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Pricing decisions - Coggle Diagram
Pricing decisions
Skimming pricing strategy
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
Usually used in technological or very innovative products which have few competitors
As competitors eventually enter the market the price is then reduced
Predatory pricing strategy
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.
When aggressive price cutting is used to deter competitors or push them out of the market
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?
Cost plus pricing strategy
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
Competitive pricing strategy
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
Penetration pricing strategy
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
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).