Price

• What are the factors of price?

  • Business objectives
  • Competition
  • Cost of production
  • Income
  • Demand
  • Stage of life cycle
  • Nature of product
• What is the definition of Price Skimming?

  Involves charging a high price initially, and then lowering the price over time. Used when a business has a unique product for which some consumers are willing to pay a high initial price
• Advantages of price skimming

  • A high price establishes product as a must have item
  • Customers want exclusivity
  • Innovation is expensive, so charging high prices will be able to pay off those costs
• Disadvantages of price skimming

  • Customers may be deterred by high prices
  • Customers may become disloyal to the brand after prices fell from such a high price
  • When firms decide to cut prices, their image might suffer
• Examples of price skimming being used


  Apple iPhone - New iPhones set at a high price then decrease over the years
• Is price skimming long-term or short-term?

  Short-term
• What is the definition of Penetration pricing?

  Involves launching a product at a low price to encourage consumers to buy it. After launch period, price is then increased. Designed to help a new product penetrate or become known within a market.
• Advantages of penetration pricing

  • Catches competition off-guard
  • Encourages WOM for product due to attractive pricing
  • Forces businesses to focus on minimising unit costs from the start
  • Low prices acts as a barrier to entry to other competitors that are considering a similar strategy
  • Sales volumes should be high, so distribution may be easier to obtain
• Disadvantages of penetration pricing

  • Low price creates expectation of permanently low prices to customers that frequently switch to different businesses. It is harder to increase prices than lower them.
  • Price may simply attract customers looking for a bargain rather than future loyal customers
  • Strategy likely to result in retaliation from established competitors, who will try to maintain their market share
• Examples of businesses using penetration pricing

  Supermarkets - see advertisements for introductory low prices for some fresh items
• Is pentetration a long-term or short-term pricing strategy?

  Short-term
• What is the definition of competition-based pricing?

  Where price is heavily influenced by the prices of competitors
• Advantages of competition-based pricing

  • Market responsiveness
  • Stay competitive
  • Aligns with industry standards
  • Very simple
• Disadvantages of competition-based pricing

  • Potential profit limitations
  • Overlooks unique value of the product
  • May undermine long-term sustainability and profitability
• Examples of businesses using competition-based pricing

  • Dominoes
  • Papa Johns
• Is competition-based pricing a long-term or short-term strategy?

  Short-term
• What is the definition of psychological pricing?

  Involves pricing products just below round numbers or choosing appealing prices to make products seem more affordable or attractive
• Advantages of psychological pricing

  • Increased sales; perception of better value, leading to higher sales
  • Improved product perception: enhances a product's perceived quality and exclusivity
  • Ease of comparison: simplifies the decision making process for customers by offering a limited number of price points
• Disadvantages of psychological pricing

  • Potential negative perception
  • Unsustainable competitive advantage
  • Price wars
• Examples of businesses using psychological pricing


  • Supermarkets
  • Clothing retailers
• Is psychological pricing a long-term or short-term pricing strategy?

  Short-term
• What is the definition of cost-plus pricing?

  Involves working out the cost per unit of producing a product before adding a percentage for the profit that the business is looking to make
• Advantages of cost-plus pricing

  • Easy to calculate
  • Price increases justified when costs rise
  • Price stability may arise if competitors take the same approach
  • Pricing decision can be made at a relatively junior level in a business based on formulas
• Disadvantages of cost-plus pricing

  • Ignores the concept of price elasticity of demand
  • Business has less incentive to cut or control costs
  • Requires an estimate and apportionment of business overheads
  • If applied strictly, pricing method may have a business in a vicious circle
• Examples of cost-plus pricing being used

  Small businesses - may want to sell their goods for 10% more than the costs to produce them. Price will then be 110% of the cost
• Is cost-plus pricing a long-term or short-term strategy?

  Long-term
• What is the definition of marginal pricing?

  Setting the price of a product above the marginal cost to produce it
• Advantages of marginal pricing

  • Earn additional profits
  • Increase market penetration
  • Increase accessory sales
  • Eliminate excess capacity or inventory
  • Smooth fluctuations in demand
  • Stay price-competitive in the short term
• Disadvantages of marginal pricing


  • Ignores current market prices
  • Does not build customer loyalty
  • Not sustainable for the long-term
  • Could be difficult to raise prices later
  • May shift higher paying customers
• Example of marginal pricing


  Product cost = £1

  Marginal price = £1.10
• Is marginal pricing a long-term or short-term pricing strategy?

  Short-term
• What is the definition of contribution pricing?

  Setting a price based on the variable cost of producing or buying a product
• Advantages of contribution pricing

  • Demand factors can be taken into account
  • Allows flexibility in pricing of individual products - low volume or successful products can be priced to give a high gross revenue
• Disadvantages of contribution pricing

  • Possible for price set for each item is not competitive
  • May be difficult to allocate costs accurately across full product range and it may be difficult to assess appropriate contribution
• Example of contribution pricing

  Price for a product is £10 and variable cost is £2, contribution margin will be £8
• Is contribution pricing a long-term or short-term pricing strategy?

  Long-term
• What is a loss leader?

  A product with a price reduction that is so low it's being sold at a loss.

  Used by retailers in order to tempt people to go into their store.
• Advantages of loss leaders

  • Can help drive customer loyalty
  • Forces customers to take a look at other products
  • Increase in sales
  • Sell off old or outdated stock
  • Attract new customers
• Disadvantages of loss leaders

  • Customers might "bulk-buy" the loss leading product
  • Risk in making a loss
  • Perception on quality (e.g. low price = low quality)
• Where will a loss leader most likely be used?


  In supermarkets