13. Pricing

• • A business can adopt new pricing strategies for:
  • To break into a new market
  • To increase market share
  • To increase profits
  • To make sure all costs are covered and a particular profit is earned
• There are five main types of pricing methods:

  • Cost-plus Pricing
  • Competitive Pricing
  • Price Skimming
  • Penetration Pricing
  • Promotional Pricing
• • Cost-plus Pricing: the cost of manufacturing the product plus a profit mark-up. It involves:
  • Total cost /output + % markup.
  • Pros:
  • The method is easy to apply.
  • Each product earns a profit for the business.
  • Cons:
  • could lose sales if the selling price is higher than competitors.
  • There is no incentive to reduce costs.
  • A total profit will only be made if sufficient product units are sold.
• Competitive Pricing: When the product is priced in line with or just below competitors’ prices to capture more of the market.

  • Pros:
  • Sales are likely to be high due to realistic level prices.
  • Avoids price competition
  • difficult for consumers to tell the difference
  • Cons:
  • High-quality products must be sold at higher prices
  • If cost is high and sales are low, competitive prices can lead to loss.
  • research will be needed to determine these prices, which costs time and money.
• Price Skimming: setting a high price for a new product on the market. A product is usually a new invention or a new product development.

  • Pros:
  • It can help establish the product as good quality.
  • High research and development costs can be rapidly recovered from profit made.
  • Cons:
  • High prices may discourage some customers from buying it.
  • High prices and profitability may encourage competitors to enter.
• Penetration Pricing: when the price is lower than the competitors’ to enter a new market.

  • Pros:
  • Often used for newly launched products to create an impact on customers.
  • Ensure sales are made, and the new product enters the market.
  • Market share should build up quickly.
  • Cons:
  • Sold at a low price; therefore, profit per unit may be low.
  • Customers may ‘get used‘ to low prices and reject the product if the price is raised.
  • It might not be appropriate for products that have a reputation for quality.
• Promotional Pricing: when a product is sold at a low price for a short time. To increase short-term sales.

  • Pros:
  • Useful for getting rid of unwanted inventory that will not sell.
  • Help renew interest in a product if sales are falling.
  • Cons:
  • Revenue will be lowered because the price of each item is reduced.
  • This might lead to price competition with competitors.
• • The impact of psychology on price decisions
  • High prices for high-quality products can be purchased for status symbols.
  • When a price is lower than a whole number, it creates the illusion of being cheaper.
  • Supermarkets may choose low prices for products purchased regularly.
  • Repeat sales are often made to reinforce/support consumers’ perceptions of the product.
• • Using different pricing methods for the same product-
  • Dynamic pricing: When businesses change product prices, usually when selling online, depending on the level of demand, for example, Aeroplane tickets.
  • There are ethical issues with some dynamic pricing; using technology, businesses can track customers' buying history and charge accordingly.
• Price Elasticity of Demand

  • Price Elasticity of Demand: How responsive is a demand for a product to a change in price?
• • Price-Inelastic Demand is when the product is not very responsive to changes in demand. The % change in demand is LESS than the % change in price.
  • This means you can increase the price of the product a lot without the demand changing (i.e., oil & petrol because people have to buy it)
• • Price-Elastic Demand is when a product is very responsive to a change in demand. The % change in demand is GREATER than the % change in price, i.e., prices increase by 5%, but sales decrease by 10%.
  • Therefore, the business's revenue would be falling with a price increase. Businesses must find another way to increase demand without using the product's price.