Pricing strategies - 3/4 Ps Flashcards
What factors affect the price of a product?
- The price is affected by all the Ps in the marketing mix i.e. heavy promotion of a product may see prices reduced to attract more people.
- The price is almost always set to make a profit.
- The price must be acceptable to customers - it depends how price sensitive the market is, but ultimately people want to feel that they are getting good value for their money.
-The PED and factors that impact that (substitutes, type of product, brand strength etc.)
-The stage in the life cycle of the product.
-The businesses objectives - if they want more market share they will reduce prices to increase demand and sales. - Level of competition - must be generally in line with competitors assuming the quality is similar - unless it is differentiated and there is a USP.
- A product with a USP can get a higher price.
What are promotional pricing strategies to be aware of?
Price Skimming and Penetration pricing.
What is price skimming? How is it done? Uses/Drawbacks?
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 is rarer and the high price infers quality, increasing appeal. Technological products tend to use this method. Many people want to be early adopters and get the early product even for more money.
Once the product has been on the market for a while, prices are dropped as new products would have likely come out and the product has lost it’s ‘novelty factor’ which will drop demand and most people prepared to pay above market price owns the product. Opponents also may try to undercut, so prices have to drop to compete.
Apple are well known for utilising this strategy.
- However, potential customers may be put off by the initial price and will wait knowing the price will inevitably drop.
What is penetration pricing? When is it suitable/ when doesn’t it work?
This is launching a product at a low price to attract customers and gain market share - this is effective in more price sensitive markets.
This works best for businesses that benefit from EOS from large supplies.
- It can be used to target a more budget conscious market segment whilst also maintaining normal prices for other products/markets. This would mean they can appeal to more than one segment of a market, whilst maintaining their premium brand image.
However, customers may expect low prices all the time and be put off when the price eventually rises - it can lose customers and damage the brand image.
It can be used to extend a product’s life cycle too.
What are some other pricing strategies?
Cost plus, predatory pricing, competitive pricing and psychological pricing.
What is cost plus pricing?
This is when a firm adds a percentage mark up to the unit cost of production. This can guarantee a business their contribution per unit, and guarantee a profit if they sell enough products. For example a business may create a product for £30 and put a 25% mark up on it, so price said product at £37.50.
What is the formula for cost plus pricing?
Price =
Unit cost + (Unit cost/100 x mark up)
What is predatory pricing?
When a business deliberately lowers prices to force another business out of the market - they could lower their prices in a specific area to force a smaller business who cannot compete to leave the market, and then raise the prices once the competitor has left. This is illegal in the EU and US. And also seen as very unethical so can damage a brand image.
What is competitive pricing?
When businesses monitor their competitors’ prices to make sure that their own prices are set at an equal or lower level. Consumers will very often go for the cheaper option when two businesses are very similar in quality and reputation. This is commonly used by supermarkets (Tesco and Sainsbury’s.) This is very common to compete, but can put businesses in price wars which can force businesses to push down prices until one cannot commit; this can be detrimental to both businesses, but good for consumers.
What is phycological pricing?
Bases the prices on customers’ expectations. For example a higher price may make people think the product is high quality. Also an insignificant change can have a large impact on the customer (99p over £1) - very commonly used though so doesn’t really change anything as people round up.
