1.3.3

• penetration pricing 


  setting a low initial price for a new product
• aims of penetration pricing 


  gain market share

  build customer loyalty

  hook and bait approach
• advantages of penetration pricing 


  word of mouth from good pricing

  distribution is easier to obtain

  focusing on minimising unit cost from the start
• disadvantages of penetration pricing 


  expectation of permanently low prices

  no customer loyalty, they are just looking for a bargin

  result in retaliation form competitors
• price skimming 


  high price is set at begining, then decreases once market share is high
• aims of price skimming 


  target early adopters

  maximise profit

  recover R&D costs
• advantages of price skimming

  higher return on investment

  maintain brand image

  segments market clearly
• disadvantages of price skimming 


  require product to be inelastic

  attracts compeptitors

  upsets easly buyers when the prices drop
• competitive pricing 


  basing your prices of your competitors prices
• who uses competitive pricing?

  businesses selling similar products

  when the price has reached a level of equilibrium
• advantages of competitive pricing 


  easy and simple

  when loss leading there is an increased market share and revenue
• disadvantages of competitive pricing 


  lower profit margins

  lack of insight

  leaving possible revenue behind
• cost plus pricing 


  where a % mark up is added to the cost of production to calculate the selling price
• advantages of cost plus pricing 


  easy to calculate

  price increases can be justifies when costs rise

  managers can be confident each product is being sold at a profit
• disadvantages of cost plus pricing 


  ignores PED

  may not take account of competitors

  profit is lost if price is set below the price which customers are willing to pay

  sales can be lost if prices are too high
• predatory pricing 


  illegal

  when prices are set low for a short perios of time to force competitors out of the market
• psychological pricing 


  when a firm sets a price for the product in order to entise the customer into making a purchase by making it sound cheaper than it is
• pricing strategies 


  skimming

  penetration

  psychological

  cost-plus

  predatory

  competitive
• factors effecting the pricing strategy used 


  USP

  PED

  level of competition in the market

  strength of the brand

  stage in the product lifecycle

  cost and the need to make a profit