1.3.3 - Pricing Strategies Flashcards
Def of pricing strategy
The approach which a business decided on for setting the price of its products or services
Def of price skimming
Involves launching a brand new products at a high price while the product is unique
Def of penetration pricing
This involves launching a new product at a very low price to entice customers to try it
How businesses decide between price skimming and penetration
If there is little competition and has no clear rivals, likely to use price skimming but If there were many close competitors this wouldn’t work
Advantages of price skimming
- high prices help to create desire-able image for product
- high prices will generate rapid profits - helping to reviver the costs of innovation quickly
- early adopters will pay the high price in return for exclusivity
Advantages of price penetration
- low prices boost sales volumes - cutting production costs
- high volumes may persuade retailers to buy the products - boosting distribution
- encourages customers to develop the habit of buying the product
Disadvantages of price skimming
- will deter some customers who are put off by price
- early buyers may be frustrated once price starts to fall
- image may suffer when price begins to fall, exclusive perception damaged
Disadvantages of price penetration
- products image may be immediately cast as cheap
- upmarket retailers may be unwilling to stock the products
- likely to create price sensitivity among consumers - a higher price elasticity
Def of cost plus pricing
This involves deciding price by adding a desires percentage onto total costs per unit
Benefit if cost plus pricing
Should guarantee profit is made on each sold unit
Drawback of cost plus pricing
Ignoring the market may mean an unrealistic price is guaranteed
When is cost plus pricing appropriate
When the firm is a market leader with little need to worry about competition
Formula for calculating mark up on unit costs - cost plus pricing
Price charged = unit cost + (% mark-up (usually 10%))
Def of predatory pricing
Tactic used by a dominant business to reduce competition. Prices are set lot intended to drive competitors out of the market
Benefit of predatory pricing
- Once a rival has been forced to close, prices can be pushed up higher, increasing margins
- more sales
Drawbacks of predatory pricing
- If proven, can be illegal
- short term loss
Def of competitive pricing
Meaning charging about the same as, or a little less than the prices of competing products
Benefit of competitive pricing
- should ensure the price will not put automates off buying the product
Drawback of competitive pricing
- firms have little control over the price they charge and the revenue they generate
- competitors could price themselves lower
Def of psychological pricing
Used to make price seem more attractive than it actually is by rounding it down
Benefits of psychological pricing
- can help nudge customers into making purchase
- increasing sales
Drawback of psychological pricing
- reduction in profit margin due to psychological gain. Could be earning more revenue with higher price unit
- may have little effect on many planned purchases and annoy customers
6 factors influencing most appropriate pricing strategy
- strength of brand
- stage of product lifecycle
- differentiation and USP
- price elasticity of demand
- competition
- cost and profit
How is pricing strategy affected by level of product differentiation
Highly differentiated products will have more control over pricing, potentially allowing them to use cost plus pricing
