1.3.3 Pricing strategies Flashcards
What are the 6 pricing strategies?
1-cost plus
2-price skimming
3-penetration
4-predatory
5-competitive
6-psychological
Whats cost plus pricing?
Where a business calculates costs to make a product per unit then adds a mark up to how much profit they want to make
What is a mark up?
adding a certain amount to the cost of goods to cover overhead and profit.
What’s the formula for cost-plus pricing?
unit cost + (%mark up)
What is a benefit and a drawbacks of cost plus pricing?
-always cover costs to make
-doesn’t consider competitors prices-may set too low and be missing out
Whats price skimming?
Business initially prices a product high then gradually decreases the price
Eg. Apple reduce price when new phone comes out cause demand for old drops
What is a benefit and a drawback of price skimming?
-can increase profit
-consumer may feel ripped off
What’s penetration pricing?
A price is set low to encourage people to buy product then they raise the price after consumers have tried the product
Eg. Spotify discounted for first year
-also used to sell off old stock
What is a benefit and a drawback of Penetration pricing?
-win over consumers from competition as it encourages them to buy your product
-customer loyalty may decrease
Whats predatory pricing?
In oligopolies or monopolies existing business may hold off the threat of a new entrant by lowering their prices so other competitors cannot make a profit
What are oligopolies and monopolies?
O- market with few competition
M-1 large firm that controls industry
(Can just increase price)
What is a benefit and a drawback of Predatory pricing?
-increased customer base
-may end up in a financial loss (decrease in value of product)
Whats competitive pricing?
A business looks at competitions prices of products and set their price at a similar or discounted price
This means customers have to judge product o a non price method like quality
What is a benefit and a drawback of Competitive pricing?
-increased profit margin (rev exceeds sales)
-price may be inaccurate if a business’ product is superior to competitors then they’re missing out
What’s psychological pricing?
Businesses use this to influence our perception as we’re influence by how prices are presented to us
-pricing at 1.99 instead of 2.00
What is a benefit and a drawback of Psychological pricing?
-Generate more sales
-consumers may find it unfair and unethical
What 4 factors determine what pricing strategies business’ use?
-Number of usps
-level of comp
-strength of brand
-costs
How does the number of usps determine what pricing strategy to use?
Products with many usps can charge premium price
How does the level of competition determine what pricing strategy to use?
In highly competitive market business may need to set price lower to remain competitive
How does the brand strength determine what pricing strategy to use?
A strong brand with loyal customer base can command higher prices
How does cost determine what pricing strategy to use?
Prices must cover the cost of production and provide reasonable profit margins
How do prices change on price comparison websites
retailers adjust their pricing strategies to remain competitive in online market place used to compare prices (compare the market)
-Retailers may even match price with comp to prevent consumers from using comp
How do prices change in online shopping?
Online shopping offers 24/7 access and convenience.
Retailers adjust prices at any time of the day based on demand and supply (may have a sale but if 500 people got it cheap, may now inc price)
Bus may offer cheaper prices online than in store to persuade them to shop online so business have no need for premises