1.3.3 Pricing Strategies Flashcards
What is cost plus pricing
Where a fixed % is added on top of the cost it takes to produce one unit, for example if it costs £2 to make a product a 50% is added and sold for £3
What is the strategy for cost plus pricing
It focuses more on the internal factors of production rather than external factors like consumer demand
What is the formula for cost plus pricing
Material+labour+overhead costs x (1+ the markup amount)
What are the advantages of cost plus pricing
-simple
-price can be adjusted if business benefits from economies of scale
What are the disadvantages of cost plus pricing
-the price can be set too high
-no incentive to operate efficiently
What is competitive pricing
Where a business sets it’s product prices similar to those of competitors in the market
What is the strategy for come to the pricing
-can either set prices lower than competitors
-set them equal
-set them slightly higher
What are the advantages of competitor pricing
-Prevents market share loss
-Ensures the business doesn’t lose too many customers to competitors
-boosts profit margins
What are the disadvantages of competitive pricing
-risky
-may not cover overheads if the business costs are a lot higher than competitors
What is price skimming
Setting high prices for a product at the start of its life cycle then lowering it after a while
What is the strategy for price skimming
The idea that early adopters are willing to pay high prices for the new product as they are first to get the product
What are the advantages of price skimming
-free advertising
-can create perception of high quality products
-creates a high end brand image
What are the disadvantages of price skimming
-only works if product is price inelastic
-early adopters may be turned off by a price decrease
-may have excess inventory
What is an example of a business with price skimming strategies
Iphone
What is penetration pricing
Offering low prices then increase it after a while
What is the strategy for penetration pricing
The strategy is building up brand awareness and drawing customers away from competitors with their low prices
What are the advantages of penetration pricing
-gain market share quick
-build brand awareness
-create brand loyalty
-high volume of sales
What are the disadvantages of penetration pricing
-customers may move back to competitors after the price rise
-poor brand image
-low prices can be perceived as low quality
What is an example of penetration pricing
Subscriptions to websites offering a free trial for the first month
What is predatory pricing
Where a product is set so low that it drives most competitors out of the market
What is the strategy for predatory pricing
Drive down costs until there is no competition then rise prices when customers have no other choice
What are the advantages of predatory pricing
-dominant market position
-minimise competition
-no place for new entrants
What are the disadvantages of predatory pricing
Its illegal in some country’s
Not feasible in the long run
What is an example of predatory pricing
A monopoly business
What is psychological pricing
Using prices to influence customer spending and habits to make more sales
What strategies are there for psychological pricing
-odd even (£2.99)
-limited time sales
-bogof
What are the advantages of psychological pricing
Increases attention to certain products
What are the disadvantages of psychological pricing
Can be seen as deceptive
No profit guarantee
Factors that determine the most appropriate pricing strategy
-number of usps a business has
-price elasticity of demand
-level of competition in business environment
-stage in the product life cycle
-costs and the need to make profit
