Pricing Strategies Flashcards
What is a strategy ?
A long term plan
What is the pricing strategy?
This is a plan of how much to charge for a good or service
What are the six types of pricing strategies?
- cost plus pricing
- price skimming
- predatory pricing
- penetration pricing
- competitive pricing
- physiological pricing
What is cost plus pricing?
This is the pricing strategy where mark up is added to the unit price
What is markup?
This is the total cost of production for the product.
Eg £5 cost = 100% markup = £10
What is price skimming?
This involves charging a high price for a new product into the market before competitors arrive and then reducing it as more competitors enter the market
What markets usually use price skimming?
Technological markets
Adv of price skimming?
-people are prepared to pay higher prices
-maximising revenue
High rev covers the cost of research and development costs
-lower cost other costumer groups drawn into market- increased demand
Disadvantages of price skimming?
- demand for product has to be inelastic
- will attract competitors into the market
What is penetration pricing?
This is when the initial price is low for a limited period of time and then increases with time
What is the aim of penetration pricing ?
To get a foothold in the market, as it attracts customers due to low prices and they gain behavioural habits of repeat purchases so the increase of price doesn’t affect the demand
Adv of penetration pricing?
- good for targeting products to low/middle income groups
- sales of the product grow quickly
- faster growth allows economies of scale to be exploited
- this strategy can put pressure on the rivals
- the lower the costs the easier it is to implement
What is penetration pricing?
Charging at extremely low prices which drive competitors out of the market
What is competitive pricing?
When businesses operate in a very competitive market , the look closely at what their rivals are charging
What are some approaches to this?
- charge the same price as competitors but establish usp etc
- the market leader to set a price and everybody follows
What is psychological pricing?
- consumers are tricked into thinking that products are cheaper than they actually are
What are factors that determine what pricing strategies the business should set for a particular situation?
- differentiation and usp
- the product elasticity of demand
- the amount of competitors in the market
- strength of the branD
- stage in the product life cycle
- production cost
Differentiation and usp as a factor
- a business can charge higher prices if a product has a usp or is sufficiently differentiated .
- because consumers are prepared to pay ore the products with additional features
Price elasticity of demand as a factor
If the demand for a firms product is price inelastic, there will be scope for price increases
- if a product is price elastic then charging higher prices would not be beneficial
