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Pricing Strategies - Coggle Diagram
Pricing Strategies
Skimming
Explanation: is used when launching a new products/ the price is set high to start, this will create high profits and maybe used to pay back high R&D costs/ usually used in technological or very innovative products which have few competitors
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
Example: when DVD players first hit the market in the late 90s, they could cost you up to $1,000
Cost Plus
Explanation: the total cost of the products are worked out then a fixed percentage of profit is added on top
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Con: 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
Example: price of pizza is calculated by dough+sauce+cheese+toppings. If you fo onto a pizza delivery site you will see that the price of the pizza usually increases if you add more toppings
Penetration
Explanation: this means setting prices really low on a new product to encourage sales and to persuade customers to try the product/ low prices hold gain the business more market share
Example: repeat purchases in mass market such as tea bags, biscuits which are called Fast Moving Consumer Goods. They are usually at low prices.
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Con: consumers may have bought anyway, even without the low start price/ expensive as it eats into profits by reducing sales revenue
Predatory
Explanation: in oligopolies or monopolies existing businesses may hold off the threat of a new entrant by lowering their prices so that any competitors cannot make a profit/ when aggressive price cutting is used to deter competitor or push them out of the market
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
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
Example: tactics between two large franchises can be seen in the prescription drug price war between Walmart and Target in Minnesota. Walmart, seeking to undercut the competition, initially began offering certain prescription drugs at well below its price floor
Competitive
Explanation: 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 the service and speed/ strategy usually used where products in a market are all very similar 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 economics of scale as the larger ones
The purpose of pricing strategy: A pricing strategy is a model or method used to establish the best price for a product or service. It helps you choose prices to maximize profits and shareholder value while considering consumer and market demand.