1.3.3 Pricing Strategies Flashcards
What 3 factors do Pricing Strategies depend on?
- the product or service itself
- competitors in the market
- the aims and objectives of the business
Name 6 Pricing Strategies
- Cost Plus Pricing
- Skimming Pricing
- Competitive Pricing
- Penetration Pricing
- Predatory Pricing
- Psychological Pricing
What does Cost Plus Pricing seek to do?
Seeks to SET a PRICE for a product or service which COVERS COST and provides GOOD PROFIT MARGIN for the business
What are 3 advantages of Cost Plus Pricing?
- PROTECTS the PROFIT MARGIN of the business
- EASISEST method of pricing to APPLY
- EASY to ESTIMATE PROFIT levels
What is Skimming Pricing?
- Used when LAUNCHING NEW product
- PRICE is SET HIGH to start, this will CREATE HIGH PROFITS and may be used to pay back high R&D costs
What are 2 Advantages & Disadvantages of Skimming Pricing?
+ high starting price can ESTABLISH an UPMARKET IMAGE
+ great way to HARVEST HIGH PROFITS for innovative products
- CHEAPER IMITATIONS of the product MAY APPEAR
- RISKY, customers may be PUT OFF from buying due to the HIGH PRICE
What does Competitive Pricing mean for customers?
Customers will have to judge a product or service on “ non-price “ methods such as; quality of service or speed
What is a Disadvantage of Competitive Pricing?
- pricing at the competitive rate MAY NOT COVER ALL COSTS
What is Penetration Pricing?
Setting PRICES REALLY LOW on a product to ENCOURAGE SALES and try to PERSUADE customers to try the product
What is 1 Advantage and Disadvantage of Penetration Pricing?
+ WORKS BEST with NEW PRODUCTS being launched to encourage consumers to try the product
- EXPENSIVE as it EATS into PROFIT by REDUCING SALES REVENUE
What is Predatory Pricing?
Holding of threats by LOWERING their PRICES VERY so that ANY COMPETITOR CAN’T MAKE a PROFIT
This is when AGRESSIVE PRICE CUTTING is used to deter competitors or PUSH THEM OUT OF the MARKET
What is 1 Advantage & Disadvantage of Predatory Pricing?
+ Intention is to DRIVE COMPETITORS out of the market place or SET a BARRIER to entry to DISCOURGAGE NEW ENTRANTS to the market
- DEPENDS on the PRICE ELASTICITY of the product, if LOW then a LOWER PRICE WON’T MAKE much DIFFERENCE to customer demand
What is the aim of Psychological Pricing?
Aim to make the CUSTOMER BELIEVE the PRODUCT is CHEAPER THAN IT REALLY IS
What is an 1 Advantage & Disadvantage of Psychological Pricing?
+ Ideal for products which want to project a premium image - price might be part of the appeal
- Can be HIGH RISK, if COMPARABLE PRODUCTS are AVALIABLE for a LOWER PRICE consumers could be tempted away
What are 6 factors that determine a pricing strategy?
1) Number of USPs
2) Price elasticity of demand
3) Level of competition in the business environment
4) Strength of brand
5) Stage in the product life cycle
6) Costs and the need to make a profit
