methods of pricing Flashcards
Market skimming
Setting a high price for a new product that is unique or very different from other products on the market.
Penetration pricing
Setting a very low price to attract customers to buy a new product
Competitive pricing
Setting a price similar to that of competitors’ products which are already available in the market
Cost plus pricing
Setting price by adding a fixed amount to the cost of making the product
Promotional pricing
Setting the price of a few products at below cost to attract customers into the shop in the hope that they will buy other products as well
Advantages of price skimming
Profit earned is very high
Helps recover/compensate research and development costs
Disadvantages of price skimming
It may backfire if competitors produce similar products at a lower price
Advantages of penetration pricing
Attracts customers more quickly
Can increase market share quickly
Disadvantages of penetration pricing
Low revenue due to lower prices
Cannot recover development costs quickly
Advantages of competitive pricing
Business can compete on other matters such as service and quality
Disadvantages of competitive pricing
Still need to find ways of competing to attract sales.
Advantages of cost plus pricing
Quick and easy to work out the price
Makes sure that the price covers all of the costs
Disadvantages of cost plus pricing
Price might be set higher than competitors or more than customers are willing to pay, which reduces sales and profits
Advantages of promotional pricing
Helps to sell off unwanted stock before it becomes out of date
A good way of increasing short term sales and market share
Disadvantages of promotional pricing
Revenue on each item is lower so profits may also be lower
