Pricing Strategies
Definition: Price is an important element of the marketing mix. The price charged for a product will affect the demand from customers to buy it.
Cost plus pricing strategy
Definition: The total cost of the
products is worked out then a fixed
percentage of profit is added on top.
Example: In a pizza restaurant, the price is calculated as dough+sauce cheese +toppings. This is why the price of the pizza usually increases if people add more toppings.
Pros: 1. Protect the profit margins of the business. 2. Easiest method of pricing to apply.
Purpose: It is used to increase sales and maximize profits by selling their goods and services for appropriate prices.
Cons: 1. This method of pricing does not take into account the prices of the competition. 2. 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.
Penetration pricing strategy
Definition: 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.
Examples: Tea bags, biscuits which are called Fast Moving Moving Consumer Goods
Pros:
- Works best with new products being launched to encourage consumers to try the product.
- Low prices should gain the business more market share.
Cons:
- Consumers may have bought anyway, even without the low start price.
- Expensive as it eats into profits by reducing sales revenue.
Skimming pricing strategy
Definition: Skimming strategy is used by launching a new product, the price is set high to start, as competitors eventually enter the market the price is then reduced.
Examples: Used in techonological or very innovative products like the computers, iphones.
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: 1. cheaper imitations of the product may appear on the marke too soon and take sales away from the product.
Competitive pricing strategy
Definition:Some prodcuts 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.
Examples: Strategy are usually used where products in a market are all very similar (homogenous) so there are lots of substitutes and have elastic demand.
Pros: 1. Useful in a market where one brand is dominant, the other brands would need to discount and offer lower prices encourage custimers to buy.
Cons: 1. 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.
Predatory pricing strategy
Definition: Business may hold off the threat of a new entrant by lowering their prices so that any competitor cannot make a profit, it is used to deter competitors or push them out of the market.
Examples: In oligopolies or monopolies existing businesses.
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 prie elasticity of the product, if it is low then a lower price won't make much difference to consumer demand.
Price Discrimination Strategy
This means charging difference prices for the same product for different segments.
Based on time of day or season.
Easier to for services rather than products.
Lower or higher prices charged due to age.
At the cinema, children tickets are usually cheaper.