Pricing Strategies 1.3.3 Flashcards
what is price
the money charged for a product or service
what are the main financial objectives of all businesses
- to maximise profit
- to achieve a target level of profits and return rate
- to maximise sales revenue
- to improve cash flow
what are the main marketing objectives of all businesses
- to maintain/improve market share
- to beat competition
- to increase sales
- to build a brand image
what is price skimming
setting a high price to maximise profits, e.g. technological devices
what is penetration pricing
offering a product at a low introductory price to gain market share quickly and build customer usage and loyalty
advantages of price skimming
- wider customer base
- creates a luxury brand image
- higher profits
advantages of penetration pricing
- can gain market share quickly
- creates a loyal customer base
disadvantages of price skimming
- unaffordable for some
- always need high quality
disadvantages of penetration pricing
- less profits to cover initial costs
how to calculate price by using a mark-up approach
add the cost per unit to make the product, then 100% of this again (mark up)
benefits of basing price on costs
- easy to calculate
- price increases can be justified
- managers can be confident that each product is being sold at a profit
drawbacks of basing price on costs
- ignores PED
- doesn’t take competition into account
- profit is lost if prices are lower than customers are willing to pay
- sales are lost if prices are higher than customers are willing to pay
what are price wars
multiple businesses reducing their prices to increase market share (does not end until weaker firms go out of business)
benefits and drawbacks of price wars for consumers
good in the short run (lower prices) bad in the long run (less competition)
what is psychological pricing
ways to deceive people into believing that a product is cheaper than it is (e.g. 99p instead of £1)
What is predatory pricing
setting prices low enough to force a competitor out of business
what are price takers
businesses who have no option but to charge the ruling market price
what are price makers
businesses who can set their own prices without worrying about rivals
what are price leaders
businesses who lead their market - their price changes are followed by rivals
what are price followers
businesses who follow the price-changing market leader
