Pricing strategies BEST Flashcards
What are the four factors tthat influence a business’ pricing decisions?
Costs
Product life cycle
Nature of product
Degree of competition
Why is cost a key factor of pricing decisions?
Businesses USUALLY aim to make profit + their prices and costs determine how much profit they will make
Can’t afford to set a price lower than their costs forever
Why is the product life cycle a key factor of pricing decisions + example?
Product’s product life cycle helps work out if a business will charge a high or low price for the product
Higher prices may be charged on release, sometimes willing to pay more for exclusivity
E.g. Apple iPhone X launch = $1,000 Autumn 2017, fell to $850 by Feb 2018
Why is nature of a product a key factor of pricing decisions?
- Is product luxury good? - Affects price
- If product is similar to competitors, it’s usually priced at similar level to competitors
E.g. In crude oil market, oil is same price no matter who produces (uniform price)
Why is degree of competition a key factor of pricing decisions?
The more competitors a business faces, the more options customers have meaning businesses must compete to attract customers using a lower price
What is price skimming?
Setting a high initial price and gradually lowering it over time
When is price skimming often used?
Before a business faces competition in the market
Competition arrives, downward pressure on the price to fall
What are the advantages and disadvantages of price skimming?
+ Maximise revenue - Customers buying early on willing to pay higher price, business can still attract other customers who can pay lower price later on in product lifecycle
+ Cover fixed costs (R&D) - R&D can be v expensive for TECH products
- Slower unit sales growth - This can give competitors more time to launch a competiting product/service. Doesn’t maximise sales at start so competitors can get more of a chance to enter market
What is price penetration?
Business tries to increase market share by offering low initial prie
Loss leaders are similar
What are the advanatges and disadvantages of price penetration?
+ Initial market share - Business can attract customers from established competitors
- Lower short-term profits - Could lead to lower average profits than would be earned w higher price. However, market share could be more important for long-term profitability of business
What are loss leaders?
Products/services sold at a price where business makes loss
Why do loss leaders operate?
To attract new customers or sell to existing customers hoping they make extra (incidental) purchases
E.g. Dollar Shave Club
What is competitive pricing?
Business sets prices based on what competitors are charging
When is competitive pricing used?
When products in market are similar
What is cost-plus pricing?
Business sets price based on what it costs to produce product/service and adding a mark-up
