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Pricing strategies - Coggle Diagram
Pricing strategies
Cost plus pricing strategy
Definition
The total cost of the products are worked out then a fixed percentage of profit is added on top
This is how the price of a pizza is calculated; dough + sauce cheese + toppings
If you go onto a pizza delivery site you will see that the price of the pizza usually increases if you add more toppings
Pro
This method of pricing 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
Con
Protects the profit margins of the business
Easiest method of pricing to apply
Penetration pricing strategy
Definition
Low prices should gain the business more market share (market penetration)
Mass market – repeat purchases e.g. tea bags, biscuits which are called Fast Moving Consumer Goods (FMCG).
This means setting prices really low on a new product to encourage sales and to persuade customers to try the product. Then when they like the product and have to keep buying it the business raises the price
Con
Consumers may have bought anyway, even without the low start price
Expensive as it eats into profits by reducing sales revenue
Pro
Works best with new products being launched to encourage consumers to try the product
Competitive pricing strategy
Definition
Some products or services are priced in line with competitors
This means that customers will have to judge a product or service on “non-price” methods such as; quality of service or speed
Strategy usually used where products in a market are all very similar (homogenous) so there are lots of substitutes and have elastic demand
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
Con
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
Skimming pricing strategy
Pro
A high starting price can establish an upmarket image
For innovative products it can be a great way to harvest high profits from early buyers who want the latest gadget / item / product and are prepared to pay a premium
Con
Cheaper imitations of the product may appear on the market too soon and take sales away from the product
Definition
The price is set high to start, this will create high profits and may be used to pay back high R&D costs
Usually used in technological or very innovative products which have few competitors
A skimming price strategy is used when launching a new product
As competitors eventually enter the market the price is then reduced
Predatory pricing strategy
definition
When aggressive price-cutting is used to deter competitors or push them out of the market
In oligopolies or monopolies existing businesses may hold off the threat of a new entrant by lowering their prices so that any competitor cannot make a profit.
Depends on the strength of the brand, will consumers switch or stay loyal?
Depends on the financial strength of the firm can they afford to cut prices?
con
Depends on the price elasticity of the product, if it is low then a lower price won’t make much difference to customer demand
pro
The intention with penetration pricing is to drive competitors out of the market place or set a barrier to entry to discourage new entrants to the market