pricing strategies Flashcards
Several factors affect pricing decisions:
- The marketing mix
- Cover the cost
- Acceptable to customers
- Price elasticity of demand
- Stage of the life cycle
- Objectives
- Level of competition
- Strong USP
The price of the product is affected by:
All of the other Ps in the marketing mix - e.g. during heavy promotion of a product, its price may be reduced
The price is often set to:
Cover the cost of making the product (or buying it from a wholesaler) and to make a profit
The price must be:
Acceptable to customers - it depends how price sensitive the target market is. Affluent consumers are less price sensitive than those at the other end of the scale
The price elasticity of demand influences:
The pricing of the product. This depends on the availability of substitutes, the type of product, whether it’s an expensive purchase, and the strength of the brand
The stage of the life cycle that the product’s in will also:
Affect pricing decisions - for example, if sales are declining then the price may be reduced
The price has to be in line with the:
Business’s objectives.e.g. it might be aiming to increase its market share, make the maximum profit, or keep its brand image up-market
The level of competition in the market influences:
Pricing decisions.
If the price is set above that of competitor products without it being differentiated in some way by:
Having a USP then no one will buy it and it may bring the business bad publicity.
If the price is too far below that of others, particularly the major players’, then customers will:
Question quality
A product with a strong USP would be able to:
Command a higher price because it is highly differentiated from any competitor products
Promotional pricing strategies for new products:
- Price skimming
- Penetration pricing
- Cost-plus pricing
- Predatory pricing
- Competitive pricing
- Psychological pricing
Price skimming is when:
New and innovative products are sold at high prices when they first reach the market
Consumers will pay more because the product has:
Scarcity value, and the high price boosts the product’s image and increases its appeal.
Example of price skimming:
Technological products, e.g. computers, tend to be priced using this method
In price skimming, prices are usually then:
Dropped considerably when the product has been on the market for a year or so - by this point everyone prepared to pay extra for being one of the first to own the product has got one.
Competitors might have entered the market with:
Imitative products at lower prices - although a business can prevent this using patents or trademarks
Some businesses use price skimming as:
A long term strategy to keep their brands more exclusive, e.g. Apple and Ray-Ban sunglasses
With price skimming, potential customers can be put off by the:
Initial high price and customers who bought the product at its initial price may be annoyed and frustrated when it suddenly drops in price after launch
Penetration pricing is:
The opposite of skimming. It means launching a product at a low price in order to attract customers and gain market share.
Penetration pricing is especially effective in markets which are:
Price-sensitive, e.g. a new washing powder or food product
Penetration pricing works best for businesses that can:
Benefit from lower costs when manufacturing large quantities of a product
A problem with penetration pricing is that:
Customers may expect the low price to continue, so it’s difficult to raise it without losing customers. It can also damage how the brand image is perceived
Price penetration isnt just for:
New products - it can be used as an extension strategy to prolong a product’s life
Penetration can also be used to:
Target a more budget-conscious market segment.
Example where penetration pricing can be used to target a more conscious market segment:
An airline might set up a no-frills, low-cost service in addition to its regular service.
By targeting a more budget-conscious market segment:
They can appeal to a new segment of the market, whilst also keeping their existing customer base who are prepared to pay more, and maintaining their premium brand image
One type of cost-plus pricing is:
When a firm adds a percentage mark-up to the costs of making or buying a single product (the unit cost). Price = unit cost + (unit cost/100 x mark-up)
Predatory pricing is when:
A business deliberately lowers prices to force another business out of the market
Example of predatory pricing:
A large nationwide business might target a successful but small local competitor by lowering their prices in that specific area until the small competitor goes out of business.
With predatory pricing, once the competitor has gone:
It will raise its prices again
Predatory pricing is illegal in:
EU and US laws
Competitive pricing is:
When businesses monitor their competitors’ prices to make sure that their own prices are set at an equal or lower level
Who use the competitive pricing method:
Supermarkets and department stores. Some stores will refund the difference in price if the product is cheaper somewhere else
Psychological pricing bases the price on:
Customers’ expectations
Example of psychological pricing:
A high price may make people think that the product is really high quality. An insignificant price change can have a big psychological impact on the customer, e.g. $99.99 seems a lot better than $100 even though its only $0.01 difference
The internet has led to the rise of online retailers and price comparison sites. This is useful for customers as it:
Allows them to shop around and find the best deals more easily
Online retailers need to be:
More price competitive, as its very easy for customers to compare prices for identical products
If there are many substitutes of a similar quality available:
The cheapest online retailer will usually achieve the sale
Online retailers may choose instead to:
Compete with other aspects of final pricing, such as offering free delivery or free returns, which affect the final price for the customer.
Extra benefits may make the:
Customer more willing to pay a higher price for the product itself
Price comparison sites make it:
Even easier for customers to compare prices for a product between many different retailers or suppliers
Price comparison sites are very popular for:
Comparing the price of services such as car insurance, flight prices and the retail prices of popular goods
Price comparison sites are popular as they:
Save customers time and effort in their search for the lowest price
The consequence for retailers is that they:
Need effective information systems so that they’re aware of prices charged by their competitors, so they can be price competitive
