1.3.3 Pricing Strategies Flashcards
Definition of pricing strategy
The pricing methods used when deciding what to charge for products
What are the 6 pricing strategies?
- Cost plus pricing
- Price skimming
- Competitive pricing
- Penetration pricing
- Predatory pricing
- Psychological
What is cost plus pricing?
Seeks to set a price that covers the cost and provides a good profit margin.
What is price skimming?
Used when launching a new product, price is high to start, as competitors enter the market, price is reduced.
What is competitive pricing?
When products/services are priced similarly to competitors.
What is penetration pricing?
Setting prices very low on a new product to encourage sales and persuade customers to try product. When they like the product and continue to buy it, price is increased.
What is predatory pricing?
In oligopolies businesses may hold off the threat of a new entrant by lowering their prices so competitors can’t make profits. Very aggressive and pushes businesses out of the market.
What is psychological pricing?
Setting the price slightly below a round figure.
Factors determining the most appropriate pricing strategy
- Number of UPS (details differentiate it from rivals).
- PED (Elastic - homogeneous products have to be priced closely to competitors. Inelastic - products without alternatives can command premium prices).
- Level of competition in business environment (availability of substitutes).
- Strength of brand (stronger brands can charge higher prices).
- Stage in the product life cycle (launch,growth,decline).
- Cost and the need to make a profit (cost of raw materials, advertisement).
Changes in pricing to reflect social trends
Online Sales:
- websites can offer lower prices than shops as they don’t have the cost of overheads, rent etc.
- online retailers need to have dynamic pricing which is constant checking/updating based on competitors prices.
Price Comparison Sites
- customers can shop around and use sites to compare prices of insurance.
