2.2.2 competing on price Flashcards
What are examples of different pricing strategies? [6]
- Cost plus
- Price skimming
- Penetration
- Predatory
- Competitive
- Psychological
What is cost plus pricing?
When a retailer wants to know the gross profit margin of a sale in advance, they might use cost-plus pricing. This is where they mark up the price from unit cost to ensure that they breakeven.
What are the advantages and disadvantages of cost plus pricing?
Advantage ~ Reduces the uncertainty of profits as they know costs will be covered
Disadvantage ~ Could lead to fall in quantity sold, revenues and profits, and market share since the price is uncompetitive
What is price skimming?
A high price is set temporarily before competitors enter the market.
When is price skimming most commonly used?
Mostly when a new product is launched and has little or no competition. It is most common where technology has changed or a product is distinctive.
Why is price skimming only used in the short term?
As the high profits earned in the market act as a signal to other firms to enter the market, so competition increases.
What is predatory pricing?
This is setting low prices to drive out firms already in the industry.
In the short run the firms make losses, but as firms leave prices are raised again.
What is competitive pricing and when is it used?
When prices are set based on the prices of competitors, and it is used when the products are similar.
What is psychological pricing?
Uses emotional and not rational reactions to the price of a good. For example pricing something at 99p instead of at £1, as consumers may feel more inclined to purchase it.
What are factors that determine the most appropriate pricing strategy? [3]
- Number of USPs/ amount of differentiation
- Price elasticity of demand
- Stage in the product life cycle
How does product differentiation allow for a higher price to be charged?
If a product is unique, a business is more likely to put a premium price on the product.
If there are several similar goods, prices are likely to be lower as firms can only differentiate on price.
How does PED determine a pricing strategy?
A good with a low PED is not very responsive to changes, so is more likely to have a higher price.
A good with a high PED is more likely to have a lower price, since the quantity sold is more dependent on the price.
How does stage in the product life cycle determine pricing strategy?
When a product has been newly launched, a business might use penetration pricing if there is lots of competition. This encourages customers to buy their product.
If the product is new and has no competition, the business might use price skimming especially if initial demand is high.
During growth and maturity, the price is more likely to be competitive, and in decline, the price is likely to be lower to sell remaining stock.
