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Pricing Strategies - Coggle Diagram
Pricing Strategies
Penetration
E.g like the discount on some video games, they would initially have a discount when they are releasing which contain a relatively low price
Pros: Works best with new products being launched to encourage consumers to try the product.
Cons: Consumers may have bought anyway, even without the low start price / Expensive as it eats into profits by reducing sales revenue
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
Competitive
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E.g Like the candy in the mass market you can use like 5 $ to get similar candies for the same price
Pros: 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
Cost-plus
Like I made a pen for about 2 RMB and I add 20% on it which I sold it for about 2.4 RMB to make 0.4 RMB profit
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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
E.g Like the high-tech industry, the Play Station 5 is an innovative product. They set a relatively high price in the introduction stage because there are a few companies to compete with them,
Pros: 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
Cons: Cheaper imitations of the product may appear on the market too soon and take sales away from the product
A skimming price strategy is used when launching a new product. The price is set high to start, this will create high profits and may be used to pay back high R&D costs
Predatory
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
Pros: 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
Cons: Depends on the price elasticity of the product, if it is low then a lower price won’t make much difference to customer demand
A prime example of predatory pricing 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.
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. If only pricing was a simple as its definition