Pricing to Compete Flashcards
What are the 6 pricing strategies?
Penetration
Skimming
Cost plus
Psycological
Competetive
Predatory/destroyer
What determines which pricing strategy is used?
Differentiation
PED
Amount of competition
Strength of brand
Stage in product life cycle
Cost, and need to make a profit
What is penetration pricing?
When a lower introductory price than competition is set to entice customers. Once a loyal customer base is established, prices are increased to a more profitable level.
When would penetration pricing be used?
By businesses to break into new markets or increase existing market share.
What factors influence how much the prices increase in penetration pricing?
Strength of brand loyalty.
Reaction of competitors.
What is an example of a company using penetration pricing?
Phone and Pay TV services offer low prices for an initial rate then prices rise to a ‘standard rate’
What do companies hope is the outcome of using penetration pricing?
They hope brand loyalty and inertia will keep customers once the introductory period finishes.
What are the negatives of using penetration pricing?
Risk of losing customers once prices rise.
Risk of profits never rising due to ^.
May cause competitors to lower prices which restricts from increasing prices.
What is price skimming?
When businesses charge a high initial price for a product.
Why is price skimming used?
In order to get as much profit as possible whilst the product is still relatively unique.
When would price skimming be used?
When products are in the introductory phase in the life cycle. Demand will be high and people will be willing to pay a high price for the product.
What is an ‘early adopter’?
The people willing to pay a high price for a highly demanded product in the introductory stage of the product life cycle.
Why is price skimming only available for a short amount of time?
Rival businesses will develop competing products which will force down prices as sales drop.
Which market is price skimming most ademant in?
Electronics, and pharmeceutacals especially for well-known businesses. They often keep skimming new ‘improvements’ as ‘better’ versions of their product i.e iPhones.
What are the negatives of using price skimming?
Early adopters may be turned away by price reductions following the initial purchase.
Difficult to implement when competetors release similar products soon after the release of the initial product.
What is competetive pricing?
Setting prices very to close to that of close competition.
When is competitive pricing used?
In highly competitive markets with many substitutes.
What will a rise in prices when using competitive pricing do?
Decrease sales.
How can businesses increase profits whilst using competitive pricing?
Focus on operating efficiently to cut costs.
Create a USP to differentiate products in order to increase attractiveness.
How do businesses using competitive pricing make their profits?
By working on low profit margins but relying on high volumes of sales.
What has Tesco, a competitive pricing user, been forced to do regarding their pricing?
Forced into price matching due to a fall in market share.
What are the negatives of using competitive pricing?
Risk of selling at a loss.
Risk of failure upon set up due to competition and a lack of loyal customer base.
Products may be low in quality in order to retain profit; this can lose customers.
What is cost-plus pricing?
Pricing based off of an assessment of costs, topped up with a percentage for profit.
What is the benefit of using cost-plus pricing?
It ensures that each product sold yields a profit.
What market is cost-plus pricing most often used in?
Retail such as groceries and clothing.
What are the negatives of using cost-plus pricing?
Pricing a mark-up can be disastrous if competitors prices aren’t taken into account.
If sales are low at the chosen price then a loss may be made.
What is predatory/destroyer pricing?
Setting low prices, even sometimes at a loss, before increasing prices to a profitable level.
Why is predatory/destroyed pricing used?
In order to eradicate competition or reduce its market share.
If making a loss, how can a business sustain to use predatory/destroyer pricing?
By making profit on other products that inherently covers the cost of the loss on the other product.
Which law makes predatory/destroyer pricing illegal?
Competition Law
Why is it hard to press charges on people using predatory/destroyer pricing?
When accused, firms just claim they are being very competitive and if costs are covered by other profits, it is hard to prove it is happening.
What are the negatives of predatory/destroyer pricing?
If costs aren’t covered by other products, losses can be made and firms may fail.
Small profit margins may make it difficult to expand or grow as a business whilst competing.
