1.3.3 Pricing strategy Flashcards
Why is choosing the right pricing strategy important?
It is essential for a business to be profitable, competitive, and successful in the long run.
What are the types of pricing strategy?
- Cost-plus
- Price skimming
- Penetration
- Predatory
- Competitive
- Psychological
What is cost-plus pricing?
It is where the business calculates the cost of production and then adds a markup which covers the business’s desired profit margin to determine the final price.
- It is commonly used by manufacturers that produce standardised goods, e.g. washing machines.
What is price skimming?
It is where the business sets a high price for a new product/service when it is first introduced into the market.
- This is effective when an established brand is introducing a new product and there is a high demand for it, e.g Apple iPhones.
- The high price helps the business recover its development and marketing costs quickly.
- The business will then gradually lower the price to ensure sales continue.
What is penetration pricing?
It is where the business sets a low price for a new product/service when it is first introduced.
- This is effective when a business wants to quickly capture market share and attract price-sensitive customers.
- Once they have enough customers, the business will start to raise the price.
What is predatory pricing?
It is where the business sets prices so low that it drives its competitors out of the market.
- This strategy is illegal in many countries as it is considered anti-competitive and harms customers by reducing choice in the market.
What is competitive pricing?
It is where the business sets its prices based on its competitors’ prices.
- This is effective when a business is in a highly competitive market and wants to maintain its market share.
- The business must continually monitor its competitors’ prices and adjust its prices accordingly in order to stay competitive.
What is psychological pricing?
It takes into account the customer’s emotions, beliefs, and attitudes towards the product/service.
What factors might a business consider when choosing a pricing strategy?
- Number of USPs/amount of differentiation
- Price elasticity of demand
- Level of competition
- Strength of the brand
- Stage in the product lifecycle
- Costs and the need to make a profit
Why might a business consider the number of USPs/amount of differentiation when choosing a pricing strategy?
- Products with many USPs and high differentiation can command higher prices.
Why might a business consider price elasticity of demand when choosing a pricing strategy?
- Businesses should set lower prices if the product is price elastic.
- Businesses should set higher prices if the product is price inelastic.
Why might a business consider the level of competition when choosing a pricing strategy?
- In highly competitive markets, businesses may need to set their prices low to remain competitive.
- In less competitive markets, businesses may be able to set higher prices.
Why might a business consider the strength of the brand when choosing a pricing strategy?
- A strong brand with a loyal customer base can command higher prices.
Why might a business consider the stage in the product life cycle of a product when choosing a pricing strategy?
- In the introduction stage, prices may be set lower to attract customers and build market share.
- In the growth stage, prices can increase as demand for the product increases.
- In the maturity stage, prices may need to be lowered again.
Why might a business consider the costs and the need to make a profit when choosing a pricing strategy?
- Prices must cover the cost of production and provide a reasonable profit margin.
How has pricing changed to account for online sales?
- Online sales offer customers convenience and 24/7 accessibility.
- Retailers have shifted their focus to online sales and adjusted their pricing strategies.
- One way that pricing has changed to reflect this trend is through the use of dynamic pricing.
- Retailers can adjust prices in real-time based on factors such as demand and competition.
- Prices are higher when supply is lower and prices are lower when supply is higher.
- Retailers may also offer different prices for online purchases compared to in-store purchases to incentivise customers to shop online, which may mean the retailer requires fewer physical stores (this will reduce the retailer’s costs).
How has pricing changed to account for price comparison sites?
- Retailers have had to adjust their pricing strategies to remain competitive in an online marketplace where customers can easily compare prices.
- Pricing has changed to reflect the rise in price comparison through the use of price-matching policies.
- Retailers now offer to match the prices of their competitors to prevent customers from switching to a competitor with a lower price.
- Retailers may also use pricing algorithms to monitor the prices of their competitors and adjust their prices automatically.
