pricing strategies Flashcards
describe cost plus
The business calculates the unit cost of a product and then adds a percentage mark-up for profit, e.g. it costs PC World £300 to purchase a laptop which they then mark up by 50% and sell to the customer for £450.
describe competitive
The price of a product is set similar to the competitors, e.g. fuel prices.
describe skimming
The price is set high to begin with and lowers over time, e.g. with electronics, such as the iPad, PS4, etc.
describe penetration
The price is set low to begin with and increases over time, e.g. ‘trial prices’ on new chocolate bars.
describe price discrimination
Prices are altered depending on a discriminating factor, e.g. different prices are often charged in the transport industries depending on age, such as a child price, adult price and senior citizen price.
describe destoryer/predatory
The price is deliberately set extremely low for a period of time to force out competitors.
describe loss leaders
A promotional price of one or more products is set unprofitably low to entice customers in to buy other products.
describe psychological
the price is set just below the next rounded number (eg £49.99 instead of £50)
adv of cost plus
A quick and easy way of setting the selling price.
Ensures that total costs are covered and a profit is generated.
adv of competitive
Avoids a price war.
Encourages competition, which improves the market as a whole.
adv of skimming
Sufficient ‘hype’ around a new product enables higher prices to be charged, which can increase profits.
Lack of competition also allows maximum prices to be charged.
adv of penetration
Encourages customers to try a new product.
The business hopes to gain repeat custom once the price rises.
adv of price discrimination
Ensures products appeal to different market segments.
Allows for high profit margins on some price brackets.
adv of destroyer/predatory
Competitors are forced out of the market, then prices can increase again.
Increases market share.
adv of loss leaders
Creates greater footfall, i.e. brings customers to the business.
Hopefully, customers will buy normal priced products while buying loss leaders.
Encourages repeat purchases.
adv of psychological
makes the customer think the product is much cheaper than it actually is
products fit price bands that customers have in mind
disadv of cost plus
Doesn’t cover indirect costs, e.g. other expenses such as rent.
Doesn’t take external factors into account, e.g. increasing prices during boom periods to maximise profits.
disadv of competitive
Other elements of the marketing mix must be better than the competition’s to ensure sales.
disadv of skimming
High initial prices can put off some customers.
Technique results in low initial sales numbers.
disadv of penetration
Very little profit can be generated during the initial low price period.
Could result in a price war if competitors set lower prices too.
disadv of price discrimination
Harder to budget for sales revenue in advance.
Loss in potential revenue from selling at a cheaper price, e.g. a child taking a seat at a football match that could have attracted the full price from an adult.
disadv of destroyer/predatory
Can only be used by larger companies that can afford to make losses while prices are low.
This illegal practice could breach the CMA’s anti-competition regulations
disadv of loss leaders
There is a risk that some customers will only buy the loss leaders, impacting on profits.
disadv of psychological
calculating the total money owed or change can be difficult
some customers may ignore the attempt of making the product seem cheaper so the rest of the marketing mix would have to convince them to purchase
factor affecting pricing strategy - target market for the product
mass-market products need to be priced in a way that will appeal to most income segments, whereas exclusive products aimed at wealthy segments can be priced higher
factor affecting pricing strategy - demand for the product
if the demand for a product is high, then the business can maximise profits by setting the price high; once demand drops, it can lower the price to encourage sales
factor affecting pricing strategy - objectives of the business
if the objective is to maximise sales, a lower price might be offered. if the objective is to maximise profits, a higher price may be set
factor affecting pricing strategy - external factors
prices should be lowered during a recession to encourage sales or increased during boom periods to maximise profits. similarly, prices may have to be lowered to respond to the price offered by competitors
factor affecting pricing strategy - cost of the product
any pricing strategy should take into account the cost to produce the product (unit cost) as well as other costs that need to be covered, such as rent. for this reason, loss leaders, and destroyer pricing should be used sparingly and for short periods
describe premium/high pricing
when a business sets its pricing higher than its competitors in order to create an image of quality
describe low pricing
when a business set its prices lower than competitors in order to attract customers and increases market share
