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Price - Coggle Diagram
Price
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Competitive pricing
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.
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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 pricing
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.
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.
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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.
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Penetration pricing
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.
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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.
Predatory pricing
Predatory pricing involves temporarily setting prices so low that competitors, especially smaller businesses, cannot compete at a profitable level
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.
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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.
Premium pricing
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.
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Drawbacks
It can limit the number of customers, due to the relatively high price.
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Premium pricing requires strong brand loyalty, which can be expensive to establish and maintain.
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Dynamic pricing
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.
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Advantages
Gives businesses greater control over their pricing method, with real-time data enabling firms to set the right (optimal) prices for different products.
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Drawbacks
customers are often unhappy about not knowing just how high a price they have to pay for the good or service.
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Loss leader pricing
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.
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.
Pricing methods
Pricing methods are the various methods of setting the amount that customers pay for certain goods and services.
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Price refers to the value of a good or service. It is the amount paid by a customer to purchase the product.