Theme 1 - Pricing Strategies - 1.3.3 Flashcards
What is the definition of pricing ?
The process of pricing is the choice of pricing strategy that a business makes when setting prices for their products or services
Predetarory pricing - when the bigger companies don’t want any more competitors so they put their prices very low even though it will harm their company so that the new company will not be able to launch
What will pricing strategy depend on ?
- the product or service itself - if its got no competition then you can do like skimming
- competitors in the market - maybe do predatory if there are competitors in the market
- the aims and objectives of the business - if your objective is to make a lot of revenue or if its to eliminate other competition
What are the 6 types of pricing strategy ?
Cost plus
Price skimming
Penetration
Predatory
Competitive
Psychological
What is cost plus pricing ?
A cost-plus pricing strategy seeks to set a price for a product or service which covers the costs of making the product for e.g. and provides a good profit margin for the business
So if it takes 1gbp to make something you would price it at 2gbp to make profit and cover the cost to make it
Cost-plus is the most logical approach to pricing because it achieves the business objective of maximising profits
What are the advantages and disadvantages of cost-plus pricing ?
Advantages:
- Protects the profit margins of the business
- easiest method of pricing to apply
- easy to estimate profit levels
Disadvantages:
- This method of pricing does not take into account the prices of the competition
What is skimming pricing ?
A skimming pricing is usually used when a new product is launching for e.g. new fifa
The price is set high to start of at launch and this will create high profits and may be used to pay back high research and developments cost of the new fifa for e.g. - fifa has very few competitors so they use skimming as they don’t have to lower their prices to match another competitor
As the product gets older or new competitors enter the market like for e.g. pez then they will lower the price for fifa
How can all the price strategies link ?
When you start a business, to get he business going you might use penetration pricing to get people to try your product and then as more people buy it and like it then you will slowly d start raising your prices and slowly start moving to cost-plus pricing so that you make bigger profit margins as your company increases. Then as your brand grows by using the money from the higher profit margins and using this this money to reinvest into the business by for e.g. market research and advertising - also to repay the R&D costs. Then you can start charging even higher prices and do price skimming. Then when you dominate the market you can do predatory pricing to try and eliminate any competitions and draw more customers to your brand.
What are the advantages and disadvantages of price skimming ?
Advantages:
- a high starting price can establish an upmarket image ( very professional )
- its a good way to gain high profits from early buyers that want the latest gadget and are prepared to pay a premium
Disadvantages:
- cheaper imitations of the products may appear on the market and take sales away from the product
- risky strategy as customers may be put off from buying due to high price
What is competitive pricing ?
It is when you price something in line with competitors so that the customer will have to judge the product on non-price factors such as quality of service or speed, taste etc
Competitive pricing is usually used when products in a market are all very similar so you would use competitive pricing to try and get your product in line with the competition and get more sales because your products non price factors are better
What are the advantages and disadvantages of competitive pricing ?
Advantages:
- It is useful in a market where one brand is dominant - in non price factors so for e.g. a chocolate could taste better than all the other so lots of people buy it however some people don’t buy it because its too expensive so if the chocolate bar price went down to the competitors then the competitors would have to lower their prices too again encourage the customers to buy theirs and not the good chocolate one as it got its price lowered
Disadvantages:
- Pricing at the competitive rate may not cover all the costs of some smaller businesses which can’t get the same economies of scale as the larger ones
What is penetration pricing
• This means setting prices really low on a new product to encourage sales and to persuade customers to try the product. Then when they like the product and have to keep buying it the business raises the price
• Low prices should gain the business more market share (market penetration)
What does predatory pricing depend on ?
it depends on the strength of the brand as consumers have to decide to switch or stay loyal
It also depends if the business has the financial strength to afford to cut the prices
What are the benefits and drawbacks of Predatory Prices ?
Benefits:
The intention with predatory pricing is to drive competitors out of the market place or set a barrier to entry to discourage new entrants to the market
Drawbacks:
Depends on the price elasticity of the product, if it is low then a lower price wont make much difference to customer demand
What is Psychological pricing ?
This means pricing a product at 1.99 rather than 2.00 to appear cheaper
Some busniess consider pricing carefully as it is often an indicator of quality - for e.g. if you have a 35p energy drink you would think that its not very high quality and that its probably bad for you
For e.g. high quality car companies avoid pricing just below but instead may price higher to match their customers expectations
What are the benefits and drawbacks of psychological pricing ?
Benefits:
- Ideal for products which want to project a premium image - the price might be part of the appeal - if you price your product higher people might think that’s its a premium product - might think more highly of it
Drawbacks:
- Psychological pricing has some risks such as if there was homogeneous products that were around the same quality people might be tempted away from your product as its more expensive - they would go for the cheaper alternative
How does number of USPs and amount of differentiation determine the pricing strategy ?
A USP is a unique selling point - its the unique details / features that differentiates itself from other products
For e.g. a gaming console could have more features like better graphics than another one
If a product is unique ( has lots of USPs ) the business is more likely to put a premium price on the product. IF there are various similar goods in the market, prices might be lowered as businesses will only be able to differentiate on price.
For example if you wanted to sell a cookie and it had lots of USPs then you might want to put a premium price on the product ( Psychological pricing ) to make the product seem very premium. Or you may want to use price skimming which means that you will put the price very high at the start then lower it as the product reaches more people
How does price elasticity of demand ( PED ) determine a pricing strategy for a particular situation ?
Elastic demand:
If your product has an elastic demand then you would have to use competitive pricing ( having a price close to competitors ) - this is because if your prices are too high then consumers will switch to alternatives - if price too low then consumers may think that your product is inferior
Inelastic demand:
If your product has an inelastic demand then this means that your product will have few alternatives ( competition ) so therefore if you start to charge a more premium price then the demand will pretty much stay the same and your consumers will keep on buying your product - you will be able to use something like cost - plus pricing as no matter what you consumers will still buy your product - obviously not in extreme cases
How does level of competition in the business environment determine the pricing strategy used ?
This is because if another business changes its pricing then all the other businesses with homogeneous products might have to all change their pricing as well
If a business wants to establish and maintain loyal customers then it will need to match or have similar prices to its competitors - competitive pricing
for e.g. some stores offer a price match
How does strength of brand determine the pricing strategy ?
A brand helps to define a business in the eyes of the customer so if a business had a strong brand then it would be able to charge more premium prices as consumers are willing to pay a higher price for the strong brands
In 84% of sales - brand is the largest influence
How might stages in the product life cycle determine what pricing strategy a business uses ?
Products in the launch phase may use price skimming if the product is unique and the business wants to claw back the R&D costs
Products in the growth and maturity stage may decide to price closer to competitors - after new imitations enter the market
Products in the maturity or decline stage may be priced lower to clear stocks before a new product is introduced
How might costs and the need to make a profit influence pricing strategy ?
The costs of a product all need to be taken into account when its price is decided:
- raw materials
- promotion and advertising
- product development and design
These all need to be taken into account as busninesses want to make a profit so they will most likely use cost plus to make a profit to cover all of the above - or even price skimming
How do social trends reflect changes in prices ?
There is a social trend where more people are using websites to buy goods and no int he physical retail shops - therefore businesses lower their prices on the websites as they don’t have to pay for the rent of running a shop etc
This means online retailers have to have dynamic pricing which is constantly checking and updating based on competitors prices
Many people now use price comparison websites as they can save money therefore businesses pay these websites to be featured on their list - this comes down as advertising therefore they might need to up their prices to pay this advertising off
