1.3.3 Pricing Strategies Flashcards
Price Skimming
High desirability factor e.g. iPhone. This involves launching a brand new product at a high price while the
product is unique.
Penetration pricing
This involves launching a new product at a very low price to entice
customers to try it.
Price skimming advantages
• High prices help to create a desirable image for the product • Early adopters will pay the high price in return for exclusivity • High prices generate rapid profits - helping to recover the costs of innovation quickly
Price skimming disadvantages
Will deter some customers with price seen as a rip-off' • Early buyers may be frustrated once price starts to fall • Image may suffer when prices begin to fall
Price penetration advantages
Low prices encourage lower-risk product sampling • Low prices boost sale volumes - cutting production costs • High volumes may persuade retailers to buy the product - boosting distribution • Encourages customers to develop the habit of buying the product
Price penetration disadvantages
Product's image may be immediately cast as cheap • Upmarket retailers may be unwilling to stock the product • Likely to create price sensitivity among customers - a higher price elasticity
For NEW products
Price skimming or price penetration
For EXISTING products
Cost-plus, predatory, competitive, psychological
Cost-plus pricing
This involves deciding price by adding a desired percentage onto total
costs per unit: Price charged = unit cost + (% mark-up)
Benefit of cost-plus
This should guarantee a profit is made on each unit sold.
Drawback of cost-plus
Ignoring the market may mean an unrealistic price is generated.
When is cost-plus appropriate
When the firm is a market leader with little need to
worry about competition.
Predatory pricing
A strategy that sets price low enough to force a competitor out of business
- often only on a local basis where competitors are smaller, local firms.
Predatory benefit
Once a rival has been forced to close, prices can be pushed up
higher, increasing margins.
Predatory pricing drawback
If it can be proven to be specifically designed only to drive
rivals out of business, predatory pricing is illegal.
Competitive pricing
A competitive pricing strategy means charging a price at the market
average or at a discount to the average price in the market.
Benefit of competitive pricing
This should ensure that price will not put customers off
buying the product.
Drawback of competitive pricing
Firms that use a competitive pricing strategy have little
control over the price they charge and thus the revenue they generate.
Psychological pricing
Less of a strategy and more of a tactic used to make fine-tuned decisions
on the price to charge, prices are set just below major psychological levels,
such as £9.99 instead of £10, or (9,995 instead of €10,000.
Psychological benefit
This can help nudge customers into making a purchase by
helping them to believe they are not quite spending £10 or £10,000.
Psychological drawback
It may have little effect on many planned purchases and
may in fact mildly annoy consumers.
Factors that determine the most appropriate
pricing strategy
Level of product differentiation, PED, level of competition, strength of brand, stage in product life cycle, Costs and the need to make a profit
Level of product differentiation
Highly differentiated products will
have more control over pricing, potentially allowing them to use cost-
plus pricing.
PED
Inelastic demand means that firms can
adjust prices however they wish without seeing major impacts on
demand, whereas a producer of a price elastic product is pushed into a
competitive pricing strategy.
Level of competition
The higher the level of competition, the less
scope a firm has for moving away from a purely competitive strategy.
Strength of brand
Strong brands differentiate products, reducing their price elasticity. This all adds up to the ability to take control over their own pricing, probably allowing a cost-plus approach.
Stage in the product life cycle
During the introduction phase there’s
a key decision to make - penetration or skimming; pricing will often
change as the product moves through growth and into maturity.
Costs and the need to make a profit:
Pricing below unit costs will lead
to loss-making, which is unsustainable in the long term. However, a
balance must be struck between pushing price above costs to maximise profit and ensuring that the price is relatively competitive.
Changes in pricing to reflect social trends, online sales
pricing online may be more sensitive than on the high
street because online consumers find it easier to compare prices than
those trudging around different stores. Pricing levels may be lower as
running an online business generates lower fixed costs than bricks and
mortar’ stores that have rents to cover in prime locations.
Changes in pricing to reflect social trends, price comparison sites:
Price comparison sites appear to encourage firms to price competitively
so their products and services show up as best value on these sites. In
fact, though, many of these sites are simply sales outlets for producers;
consumers should beware of assuming they are being told about the
best deals available.
