Economics Theme 2.2.2 Flashcards
What are the 6 pricing methods
cost plus
price skimming
penetration pricing
predatory
competitive
psychological
What is the cost plus pricing strategy
Cost plus pricing is when a percentage markup is added to the cost of producing a good or service to calculate the selling price
variable cost+ a proportion of fixed cost (per unit) + a percentage markup
What is the price skimming pricing method
Setting a high initial price for a product in order to recoup costs
this targets the segment of early adopters- who want products as soon as they are launched and are willing to spend high prices
Often promote the items as ‘must have’
once the market is skimmed off the price is lowered
What is the penetration pricing method
Price penetration involves setting a low initial price to get a foothold in the market and aquire market share
Suitable for products in mass markets
The low price entices people to buy
Aim to gain early customer base
likely to be used with an elastic product
What is predatory pricing method
Prices are set low for a short period of time to force competitors out of the market
Prices are then put back
This is used by dominant businesses who can afford to run at a short term loss to force new entrants out of the market
What is the competitive pricing method
Prices are based on competitors prices- same or slightly lower
They become either a price leader or a Price taker
Price leaders have firms which dominate markets with a product set at a price which other firms follow
They try not to lower the price too much because it ends up with no winner
Price takers are smaller firms who set prices based of the market price
A small firm doesnt usually lower price because their market share will stay the same just at a lower price
What is the psychological pricing method
Psychological pricing is where the firm sets the price to entice the customer to buy, by making it sound cheaper than it is
e.g 9.99 rather than £10
What factors impact choice of pricing method
Usp/differentiation
price elasticity of demand
level of competition in the business environment
strength of brand
stage in product lifestyle
costs
How does usp effect the pricing method chosen
the more usp/differentiation the product has
The more differentiated a product is the higher chance people will pay more for it
How does price elasticity of demand effect the pricing method chosen
If customers are sensitive to price change .e.g the product is price elastic then a business might keep prices similar to competitors
How does level of competition in the market effect pricing method chosen
If the market is dominated by a few large firms businesses will follow a strategy of competitive pricing
Businesses may choose a strategy of predatory pricing in order to reduce the level of competition in the market
How does strength of brand effect pricing method chosen
A strong brand adds value allowing a firm to charge a premium price
How does stage in product lifestyle effect the pricing method chosen
When launched onto the market a firm may choose skimming or penetration depending upon the nature of the product and the marketing objective
A technologically advanced product, for example, may use price skimming
How does cost effect pricing method chosen
A business will need to set a price that covers costs in order to make a profit and may therefore use cost plus pricing
The % mark up added will be determined by their profit objective
How have online sales led to frequent use of dynamic price
Because Prices change frequently and quickly in response to changes in demand
At times of peak demand prices will go up and vice versa
Often used by businesses with set capacity e.g. an airline so as the plane reaches full capacity prices will start to rise
Dynamic pricing is made possible by technology that tracks demand and levels of interest
