Pricing Strategies

• Types of Pricing Strategies:

  • Cost Plus
  • Price Skimming
  • Penetration
  • Predatory
  • Competitive
  • Psychological
• Cost Plus is where a mark up is added to the cost of the product to give you the selling price.
• markup= (selling price - cost) / (cost) * 100
• Advantages of Cost Plus:

  1. protects the profit margins of the business.
  2. easiest method of pricing to apply.
• Disadvantages of Cost Plus:

  1. method of pricing does not take into account the prices of competition.
• Price Skimming is setting a high initial price for a new product in order to recoup costs.
• Advantages of Price Skimming:

  1. high starting price can establish an upmarket image.
  2. great way to harvest high profits from early buyers for innovative products.
• Disadvantages of Price Skimming:

  1. Cheaper limitations of product may appear in the market too soon, taking sales away.
  2. risky as customers may turn away from high prices.
• Penetration involves setting a low price to gain a foothold in the market.
• Advantages of Penetration:

  1. works best with new products being launched to encourage consumers to try the product.
• Disadvantages of Penetration:

  1. Consumers may have bought even without the low starting price.
  2. Expensive as it eats into profits by reducing sales revenue.
• Predatory is when prices are set low for a short period of time to force competitors out of the market.
• Advantages of Predatory:

  1. The intention is to drive competitors out of the market place.
  2. Set barrier entry to discourage new entrants to the market.
• Disadvantages of Predatory:

  1. Depends on the PED of the product.
• Competitive is based around the competitions charged.
• Advantages to competitive:

  1. useful in a market where one brand is dominant and other brands would need to discount and offer lower prices.
• Disadvantages of Competitive:

  1. pricing at a competitive rate may not cover all the costs of some small businesses which can get the same economies of scale as larger ones.
• Psychological is when a firm sets a price for the product in order to entice the customer into buying by making it sound cheaper than it actually is.
• Advantages to Psychological:

  1. Ideal for products which want to project a premium image.
• Disadvantages to Psychological:

  1. can be high risk if comparable products are available at a lower price, so consumers tempted away.
• Factors that determine pricing strategy:

  • Number of USP
  • PED
  • Level of competition
  • Strength
  • Stage in product Life Cycle
  • Costs and need to make profit
• Number of USP means new products entering the market can charge a higher price.
• If customers are sensetive to a change in price than you will stick pricing close to competitors.
• Level of competition might mean using a predatory strat to eliminate competition or if its saturated by larger firms, then sticking price to competitive price is better.
• products in 'development/launch' phase of life cycle may use price skimming if product is unique or if business wants to recoup costs.
• Products in 'Growth/Maturity' phase of life cycle may use competitive pricing after limitations enter the market.
• Products in 'maturity/decline' phase of life cycle may price lower to clear stocks before introducing new product.
• To ensure profits, businesses may use skimming or penetration.
• To ensure costs are covered, business may use costs plus.
• Dynamic pricing is based on real-time changes in supply and demand; monitoring competitor activity.
• Personalised pricing is practice of charging individual consumers prices that are based on their characteristics.
• Subscription pricing is when clients pay a recurring fee to use a product/service.
• Changes in pricing to reflect social trends through:

  • online sales.
  • price comparison sites.