Pricing Strategies Flashcards
Define PRICE
Price is the amount paid by a consumer for a good or service.
Define PRICING STRATEGIES
Pricing strategies are methods that an organisation will use to price its products in order to meet marketing objectives.
Define PRICE SKIMMING
Price skimming is a pricing strategy that involves setting a high initial price in order to target early adopters and cover high research and development costs. After this, the price will be lowered in order to widen the market.
What are the advantages of price skimming?
- Can generate high levels of revenue before competitors arrive
- Helps to cover high r&d costs
- Exploits the product’s price inelastic demand with early adopters.
What are the disadvantages of price skimming?
- Sales are likely to be low in the early stages.
- Initially leads to high unit costs.
- The high price (and potential for high revenue) can attract competitors and erode market share.
Define PENETRATION PRICING
Penetration pricing is a pricing strategy that involves setting a low initial price in order to gain a loyal customer base and build market share. Once the product is established, the business will increase price.
What are the advantages of penetration pricing?
- Low prices may attract high sales volumes amongst low income consumers.
- High sales volume allows the business to benefit from economies of scale.
- Applies pressure to rivals and may deter them.
What are the disadvantages of penetration pricing?
- The brand may be considered low quality
- Price sensitive may greatly impact demand when prices are raised.
Define COST PLUS PRICING
Cost plus pricing is a pricing strategy that involves the business adding a percentage mark up to the cost of production so the business can earn a profit. The percentage mark up is how much the business wants to earn in profits.
What are the advantages of cost plus pricing?
It ensures that the price chosen will generate the desired level of profit.
What are the disadvantages of cost plus pricing?
- Ignores the market conditions (consumers and competitors)
- It is difficult to calculate unit costs.
Define PREDATORY PRICING
Predatory pricing is a pricing strategy that involves the business setting prices low for a period of time in order to drive competitors out of the market. Prices are then put back to where they were before or even higher.
What are the advantages of predatory pricing?
- Can reduce competition
- Increases profitability in the long run
What are the disadvantages of predatory pricing?
- Risky strategy that guarantees a loss in the short term.
- Not guaranteed to drive competitors out of the market.
- Illegal within the EU if the seller has dominant market position.
Define COMPETITIVE PRICING
Competitive pricing is a pricing strategy that involves a business setting its products after considering the prices of its competitors. If they offer differentiation, the business may be able to charge higher prices, or they could undercut competitors to build market share.
