The marketing mix: price Flashcards
What are the main pricing methods?
- Cost-plus pricing
- Competitive pricing
- Penetration pricing
- Price skimming
- Promotional pricing
What is cost-plus pricing?
Cost-plus pricing is a pricing strategy that involves working out the average cost per unit of a product and then adding a percentage markup.
What are the benefits of cost-plus pricing?
- The method is easy to apply.
- Different profit mark-ups could be used in different markets.
- Each product earns a profit for the business.
What are the limitations of cost-plus pricing?
- Businesses could lose sales if the selling price is higher than competitors’ prices.
- A total profit will only be made if sufficient units of the product are sold.
- There is no incentive to reduce costs - any increase In costs is just passed on to the customer as a higher price.
What is competitive pricing?
Competitive pricing involves setting prices in line with your competitors’ prices or just below their prices.
What are the benefits of competitive pricing?
- Sales are likely to be high as the price is at a realistic level and the product is not under or overpriced.
- Avoids price competition, which can reduce profits for all businesses in the industry
- Often used when it is difficult for consumers to tell the difference between the products of different businesses.
What are the limitations of competitive pricing?
- If the costs of production for a business are higher than those of competitors
- A higher quality product might need to be sold at a price above competitors’ prices to give it a higher quality image
- In order to decide what this price should be, detailed research would be needed into what prices competitors are charging
What is penetration pricing?
Penetration pricing is when the price is set lower than the competitors’ prices in order to be able to enter a new market.
What are the benefits of penetration pricing?
- Often used for newly launched products to create an impact with customers
- It should ensure that sales are made and the new product enters the market successfully
- Market share should build up quickly.
What are the limitations of penetration pricing?
- The product is sold at a low price and therefore the profit per unit may be low
- Customers might get used to low prices and reject the product if the business starts to raise the price after the product’s early success.
- Might not be appropriate for a brand product with a reputation for quality.
What is price skimming?
Price skimming is where a high price is set for a new product on the market.
What are the benefits of price skimming?
- Skimming can help to establish the product as being of good quality
- High research and development costs can be rapidly recouped from the profit made on the product at the high price
- If the product is unique, a high price will lead to profits being made before competitors launch similar products
What are the limitations of price skimming?
- The high price may discourage some potential customers from buying it
- The high price and high profitability may encourage more competitors to enter the market
What is promotional pricing?
Promotional pricing is when a product is sold at a very low price for a short period of time. It would be used when a business wants to price a product at a low price for a set amount oft time to increase short-term sales.
What are the advantages of promotional pricing?
- It is useful for getting rid of unwanted inventory that will not sell
- It can help to renew interest in a product if sales are falling, for example during an economic recession
