1.3.3 pricing strategies

• pricing strategies

  1. cost-plus pricing
  2. price skimming
  3. competitive pricing
  4. penetration pricing
  5. predatory pricing
  6. psychological pricing
• cost-plus pricing

  involves adding a mark-up to unity costs. the mark-up is usually a percentage of the unit cost

  advantages:

  • protects the profit margins of the business
  • easiest method of pricing to apply

  disadvantages:

  • ignores market conditions
• price skimming


  some businesses may launch a new product charging a high price for a limited time

  advantages:

  • establish an upmarket image
  • maximise revenue
  • faster recovery of R&D expenses

  disadvantages:

  • cheaper imitation of the product may appear on the market too soon and take sales away
• competitive pricing


  some products or services are priced in line with competitors

  advantages:

  • a price war is likely to be avoided
  • an effective strategy to maintain market share

  disadvantages:

  • pressure on the profitability of smaller competitors as they cant get the same economies of scale as the larger ones
• penetration pricing


  introduce a new product and charge a low price for a limited period

  advantages:

  • to encourage customers to try new products
  • fast growth in sales may help lower production cost by exploiting economies of scale

  disadvantages

  • an expensive strategy as it eats into profits by reducing sales revenue
  • difficult to raise prices if the offers are extended too long
• predatory pricing


  it aims to eliminate competitors by charging a very low price for a period of time until one or more rivals leave the market

  advantages:

  • eliminate competitors
  • set a barrier to entry to discourage new players to enter the market

  disadvantages:

  • this strategy is illegal in many countries as it is considered anti-competitive
• psychological pricing


  the strategy set the price slightly below a round figure, eg, charging £99.99 instead of £100

  advantages:

  • increases competitiveness: for similar products with little differentiation, consumers are likely to choose the slightly cheap one

  disadvantages:

  • it may become ineffective if comparable products follow the same strategy
• businesses must set prices that maximise revenue and profitability.

  this requires understanding customers, competitors and costs.

  prices also play a significant role in positioning the brand in the market and help a firm to compete effectively.

  a business needs to consider various factors when setting its pricing strategy
• factors affecting pricing strategy:

  1. number of USPs or level of differentiation

  • products with many USPs and high differentiation can command higher prices
• factors affecting pricing strategy:

  2. price elasticity of demand

  • a business needs to consider the price elasticity of demand when setting its prices
  • eg, if a business is in a highly competitive market with many substitutes, lowering prices will increase revenue
  • businesses should set lower prices, if the product is price elastic
  • businesses should set higher prices if the product is price inelastic
• factors affecting pricing strategy:


  3. level of competition

  • in highly competitive markets, businesses may need to set their prices low to remain competitive
  • eg, the budget airline industry is highly competitive and airlines keep their prices low to increase demand
  • in less competitive markets, businesses may be able to set higher prices
• factors affecting pricing strategy:


  4. strength of the brand

  • a strong brand with a loyal customer base can command higher prices
  • eg, Nike's strong brand allows it to charge premium prices for its athletic shoes and apparel

  * in 84% of sales brand is the largest influence on price
• factors affecting pricing strategy:


  5. costs and need to make a profit

  • prices must cover the cost of production and provide a reasonable profit margin
  • eg, a restaurant needs to consider the cost of ingredients, labour, rent and other expenses when setting menu prices
• factors affecting pricing strategy:


  6. stage in the product life cycle

  • introduction stage, prices may be set lower to attract customers and build market share
  • in growth stage, prices can increase as demand for the product increases
  • in the maturity stage, prices may need to be lowered again
  • if the product is in decline, then prices are usually lowered even further