1.3.3 Pricing Strategies Flashcards
Name the 6 pricing strategies
Cost plus Price skimming Penetration Predatory Competitive Psychological
What is cost plus (give pros + cons)
- Setting a price to cover costs and make a profit
Pros - protects profit margins
- easy to estimate profit
- easy method
Cons - doesn’t account for competitions pricing
What is skimming price (pros + cons)
Price set high at launch and lowered as competition enters the market Pros - establishes upmarket image - good for high profits Cons - high risk (customers put off) - cheaper products may appear quickly
What is competitive pricing (pros + cons)
Price is in line with competitors usually in high saturated markets
Pros
- useful when one brand is dominant
Cons
- may not cover costs of a small business
What is Penetration pricing (pros + cons)
Setting prices low to encourage sales and then gradually rising them over time
Pros
- helps a business get more of a market share
- useful at product launch
Cons
- consumers may have paid a higher price which eats into profits
What is predatory pricing (pros + cons)
Aggressive price cutting to push competition out of the market
Pros
- helps businesses keep a high market share
Cons
- dependent on price elasticity
- reduces profit
What is psychological pricing (pros + cons)
Pricing a product to change a customers opinion
e.g. £1.99 instead of £2.00 or high prices to gain exclusivity
Pros
- can be used to project a premium image
Cons
- high risk if comparable products can be bought at a lower price
What factors influence pricing strategies
- amount of differentiation
- price elasticity of demand PED
- level of competition
- strength of a brand
- stage in the product life cycle
- costs and the need to make profit
How does the amount of differentiation affect pricing
USP’s allow a business to demand higher prices
How does PED affect pricing
Elastic demand - pricing stays close to competitions
Inelastic demand - allows pricing to vary
How does the level of competition in a market affect pricing
Availability of substitute products will affect pricing decisions.
If a business wants to build customer loyalty then they may use competitive pricing.
How does the Strength of a brand affect pricing
A strong brand can charge higher prices
How does the stage in the product life cycle affect pricing
Early stages - penetration or skimming
Growth/maturity - competitive
Decline - price may be lowered
How do costs and the need to make a profit affect pricing
A business will want to break even so they may price to achieve this
(Cost plus)
How has online retailers approach pricing strategies
1) online retailers need to be more price competitive as it is easy for consumers to compare prices of substitutes
2) online retailers may add extra benefits like free delivery and free returns to achieve the sale
