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Pricing decisions - Coggle Diagram
Pricing
decisions
Cost Plus Pricing Strategy
Pros: 1. Protects the profit margins of the business 2. easiest method of pricing to apply
Definition: The total cost of the products are worked out then a fixed percentage of profit is added on top
Cons: 1. Does not take into account the prices of the competition
If the price of raw materials goes up then the business would have to raise its prices, which is OK if the product has inelastic demand
Skimming Pricing strategy
Definition: Used when launching a new product, setting the price high to start, and then reduced
Pros: 1. A high starting price can establish an upmarket image 2. for innovative products, it can harvest high profits
Cons: Cheaper imitation of the product may appear to take sales away
Competitive pricing strategy
Definition: Some products or services are priced in line with compeititors, and customers will have to judge a product on non-price method
Pro: Useful in a market where one brand is dominant, the other brands would need to discount and offer lower prices encourage customers to buy
Cons: Pricing at the competitive rate may not cover all the costs of some smaller businesses which can’t get the same economies of scale as the larger ones
Penetration pricing strategy
Definition: charge the price really low to enter a market and get the market share. Gradually increases the price
Pro: beneficial for new product which is launched to encourage customers to purchase
Cons: Consumers may have bought anyway even without the low start price
Expensive as it eats into profits by reducing sales revenue
Predatory pricing strategy
Definition: Lowering the price to let competitors cannot get profit and leave the market.
Pro: The invention with penetration pricing is to drive competitors out of the market place or set a barrier to entry to discourage new entrants to get into the market
Cons: Depends on the price elasticity of the product, if it is low, then a lower price won't have a big difference to customer demand