Price
Cost-plus (mark-up) pricing
Penetration pricing
Loss leader pricing
Predatory pricing
Premium pricing
Dynamic pricing
Competitive pricing
Contribution pricing
Pricing should be consistent with
Marketing planning
Product
Promotion
Place
factors that can affect choice of pricing methods
The nature of the business
The nature of barriers to entry
Business image
Business costs
The state of the economy
Non- pricing strategies
Price refers to the value of a good or service. It is the amount paid by a customer to purchase the product.
Competitive pricing is the practice of a business setting the price of its goods or services at the same or similar level to that of its competitors.
Contribution pricing is the practice of setting the selling price of a product higher than the direct costs of production per unit in order to ensure there is a positive contribution made towards payment of indirect costs.
Cost-plus pricing (or mark-up pricing) involves adding a percentage or specific amount of profit to the cost per unit of output in order to determine the selling price.
Dynamic pricing is the practice of varying the price of a good or service to reflect changing market demand, such as during different times of the day or year.
Loss leader pricing involves setting the price of a good or service below its costs of production. The purpose is to entice customers to buy other products with high profit margins in addition to purchasing the loss leader product.
Mark up
Mark-up refers to the extra amount charged by a business on top of its unit costs of production in order to earn a positive profit margin. The mark-up can be expressed as an absolute amount (e.g. $10 per unit) or as a percentage of the cost (e.g. 75% per unit).
Predatory pricing involves temporarily setting prices so low that competitors, especially smaller businesses, cannot compete at a profitable level
Premium pricing is when the price of a good or service is set significantly higher than similar competing products, usually because the product is of higher quality or is sufficiently unique to justify the premium price.
Penetration pricing involves setting low prices in order to gain entry into a new market. Once the product or brand has established market share, prices can be raised.
Price elasticity of demand (PED)
Price elasticity of demand (PED) measures the degree of responsiveness of demand for a product due to a change in the price of that product.
Pricing methods
Pricing methods are the various methods of setting the amount that customers pay for certain goods and services.
The main advantage of cost-plus pricing is its simplicity and ease of calculation.
However, cost-plus pricing often relies too much on intuitive decision making, rather than on any actual market research about the needs of customers.
The low price can also allow the firm to create brand awareness and brand recognition.
This strategy is suitable for mass market products that sell in large enough volumes to sustain low profit margins, such as fast-moving consumer goods sold in supermarkets.
It is also suitable for products that have a high price elasticity of demand (PED) whereby lowering price leads to proportionately higher sales volume.
Loss leader products can also be used to encourage brand switching, which in the long term can make up for the losses incurred whilst the product was priced at a loss.
Loss leader pricing is also commonly used when a business wants to enter or penetrate a market. It is used to attract new customers to a good or service with the intention of establishing a customer base and securing future and recurring sales revenues.
The aggressive nature of this pricing method means that the price is set so low (in order to attract customers away from competitors) that it destroys the sales of rivals in the market that cannot compete on price.
Predatory pricing itself
is illegal in many parts of the world
Price wars
Price wars involve businesses competing by a series of continuous and/or intensive price cuts to threaten the competitiveness of rival firms in the market.
Advantage
Generate higher profit margins
It creates higher barriers to entry for competitors
Gain from increasing the brand's value for all their products.
Drawbacks
It can limit the number of customers, due to the relatively high price.
Premium brands may lose their status if they appeal to the mass market.
Premium pricing requires strong brand loyalty, which can be expensive to establish and maintain.
Customers must be convinced that the product is worth the premium price.
AKA real-time pricing or surge pricing
Advantages
Drawbacks
Gives businesses greater control over their pricing method, with real-time data enabling firms to set the right (optimal) prices for different products.
Enable the firm to maximize its profit
customers are often unhappy about not knowing just how high a price they have to pay for the good or service.
Customers feel exploited
Can damage the reputation of the business and harm future sales
AKA going-rate pricing
3 options
Pricing above the competition
Pricing on the same level as the competition
Pricing below the competition
For businesses trying to survive in a highly competitive market.
Lower price means lower profit margins
Lower price means it could potentially negatively affect the brand's image.
The focus is on brand differentiation, such as the special features of the product.
Suitable for a business that believes setting a higher price can help its brand image of being a superior product.
In order to charge more, the business might need to provide extra features or services to justify the slightly higher price.
Advantage
Simple and requires minimal effort.
Business can remain competitive
Drawback
Business needs another way to attract customers, by using non-price methods to differentiate itself in a highly competitive market, such as advertising (to raise brand awareness) and providing superior customer service. This will clearly add to the firm's costs.
Contribution refers to the amount left over from the selling price after deducting all direct costs of production
The surplus is then used to contribute towards paying the firm's fixed or indirect costs of production.
Advantage
It ensures the selling price is set high enough to cover both direct costs and contributes to the payment of indirect costs.
Ensures a business does not make a loss each time it makes a sale.
Drawbacks
Allocating indirect costs between different products can be subjective, which is deemed to be unfair or inequitable.
The business still needs to double-check the resulting contribution price to ensure that it remains competitive.
Price inelastic
If there is a relatively small change in quantity demanded following a change in price, then demand is said to be price inelastic.
Price elastic
Demand is price elastic if there is a relatively large change in demand following a change in the price,
If PED is less than 1
If PED is equal to 1
If PED is greater than 1
then demand is price inelastic
Therefore, a business can increase sales revenue by increasing price.
then demand is of unitary price elasticity,
a change in price leads to a proportional change in the quantity demanded.
Change in price does not lead to any corresponding change in sales revenue.
relatively unresponsive to changes in price as the percentage change in demand is lower than the percentage change in price.
then demand is price elastic
demand for the product is relatively responsive to changes in its price.
Therefore, a business can increase sales revenue by reducing price.
This information can be used to
Helping firms to decide on their pricing policy
Determining which products are most affected by a downturn in the economy
Predicting the effects of exchange rate fluctuations
Helping governments to determine the optimum level of taxes to impose on certain products