Lesson 6-Pricing Strategies

Cards (31)

  • Pricing strategies
    The various techniques that firms use to set the prices of their products or services
  • Pricing strategies
    • Designed to help firms maximize their profits while taking into account the market conditions and the behavior of their customers
  • Common pricing strategies in economics
    • Cost-plus pricing
    • Value-based pricing
    • Penetration pricing
    • Price skimming
    • Dynamic pricing
    • Bundle pricing
    • Psychological pricing
  • Cost-plus pricing
    A pricing strategy that involves adding a markup to the cost of producing a product to determine its selling price
  • Calculating selling price using cost-plus pricing
    1. Determine total production cost
    2. Add markup to production cost
  • Advantages of cost-plus pricing
    • Relatively simple to calculate
    Ensures firm is making a profit on each unit sold
  • Disadvantages of cost-plus pricing
    • Does not take into account market demand or competition's pricing strategy
    May result in pricing too high or too low
  • Value-based pricing
    A pricing strategy that involves setting the price of a product based on the perceived value that it provides to customers
  • Value-based pricing
    • Focuses on how much the product is worth to the customer rather than cost of production or competition
    Allows firms to charge higher prices for products perceived as higher quality or providing greater benefits
  • Perceived value

    Determined by a combination of factors such as quality, performance, features, and benefits
  • Advantages of value-based pricing
    • Allows firms to capture more of the value they create for customers
    Can result in higher profit margins and a more sustainable business model
    Can lead to increased customer satisfaction
  • Challenges of value-based pricing
    • Requires deep understanding of customer needs and preferences
    Requires continuous monitoring and adjustment of pricing strategy
  • Penetration pricing
    A pricing strategy used when introducing a new product, involving setting a low price to penetrate the market and gain market share
  • Objectives of penetration pricing
    • Gain market share quickly
    Establish the firm as a viable competitor
  • Advantages of penetration pricing
    • Generates a lot of interest in the product quickly
    Helps establish the firm as a viable competitor
    Builds a customer base for future sales
    Generates revenue quickly
  • Disadvantages of penetration pricing
    • Difficult to increase price once product becomes popular
    Low price may give impression of lower quality
  • Price skimming
    A pricing strategy used when introducing a new product, involving setting a high price initially to maximize profits in the short term
  • Objectives of price skimming
    • Generate as much profit as possible from early adopters and customers willing to pay a premium
    Gradually reduce price as demand stabilizes
  • Advantages of price skimming
    • Generates significant revenue quickly
    Helps establish the product as a premium brand
    Helps recoup R&D costs
    Deters competitors from entering the market
  • Disadvantages of price skimming
    • Limits potential market by deterring price-sensitive customers
    High price may lead to perception of higher quality than actual
  • Dynamic pricing
    A pricing strategy that involves adjusting the price of a product in real-time based on changes in supply and demand
  • Objectives of dynamic pricing
    • Maximize revenue by charging customers the highest price they are willing to pay at any given time
  • Advantages of dynamic pricing
    • Allows firms to maximize revenue
    Allows quick response to changes in supply and demand
    Can help balance supply and demand
  • Disadvantages of dynamic pricing
    • Can lead to price discrimination and be seen as unfair by customers
  • Bundle pricing
    A pricing strategy that involves offering a group of products or services together for a single price
  • Objectives of bundle pricing
    • Increase the value proposition for customers
    Increase the average order value for the firm
  • Advantages of bundle pricing
    • Increases perceived value for customers
    Increases average order value for the firm
    Can help clear out inventory
  • Disadvantages of bundle pricing
    • Difficulty determining optimal bundle price
    Customers may not want all items in the bundle
  • Psychological pricing
    A pricing strategy that involves setting prices to take advantage of customers' perceptions or emotions
  • Examples of psychological pricing

    • Prices ending in .99 instead of .00
    Prices with repeating digits or patterns like $4.44 or $99.99
    Limited-time sales or low introductory prices
  • Psychological pricing

    • Aims to influence customer behavior by appealing to psychological tendencies or biases
    Should be used ethically and responsibly to avoid damaging reputation or reducing perceived value