Pricing Strategies Flashcards
What is pricing strategy and what are the 6 types of pricing strategy?
Pricing strategy is when there is a set of plans to help a business achieve it’s marketing goal and corporate objectives. The 6 types of pricing strategies are cost plus pricing, price skimming, penetration pricing, predatory pricing and competitive pricing and psychological pricing.
What is cost plus pricing?
This is when a mark-up is added to unit costs in order to generate a profit. This method is common with retailers. But there a couple of problems with this. Firstly they ignore market conditions, where the mark-up of a business may be way too high in relation to the prices of rival products. And secondly, it’s difficult to precisely identify the costs associated with the production of a particular product, especially for multi-product businesses.
What is price skimming?
This is when businesses may launch a product into a market charging a high risk for a limited time period. The aim of this strategy is to generate high levels of revenue with a new product before competition arrives and exploit the popularity’s new product while it is unique. This method is common with technical products. The one key advantage is that revenue can be maximised when high prices are charged because certain customers will be prepared to buy them. As the price is lowered, other customers are drawn into the market.
What is penetration pricing?
Sometimes a business will introduce a new product and charge a low price for a limited time period. Businesses using this strategy hope customers are attracted by the low price and carry on buying it when the price rises. This type of pricing is good because it puts pressure on rivals, targets middle to low income groups who will respond well to the product launch and lowers the business’ production costs.
What is predatory pricing?
It’s pricing that aims to eliminate competitors from entering the market. It involves charging a very low price for a limited time period until a few rivals leave the market. But only some forms of this pricing are legal. For example only low-cost businesses can use this low-price strategy if they are prepared to endure low profit margins for extended periods of time.
What is competitive pricing?
This is when businesses are taking a closer look at what rivals are doing. This is likely to be used in a fiercely competitive market. On approach is to charge the same price as competitors and avoid price wars. Or the market leader sets the price and others follow (price leadership).
What is psychological pricing?
When you set a price slightly below a round figure. e.g £99.99 instead of £100. This targets consumers who are looking for bargains.
