Business paper 3 - Pricing Strategies
Price skimming
Advantages
Disadvantages
Definition
This is when a premium price is set for a product when it first enters the market. There is high demand and customers are not price sensitive. The price is then reduced to be more competitive later to attract other customers, as part of an extension stratergy regarding the product life cycle. Example product : a games console.
High Profit margins
Extend the product life cycle
Premium price adds to the brand image and suggested quality
Early customers may be put off by the price, limiting sales to begin
Need to invest in promoting the brand in order to support the high price charged
Cost plus pricing
Definition
Advantages
Disadvantages
A business will work out the cost of producing a product and add a percentage onto it to ensure that they make a profit. Example : a builder might estimate a cost of the works and add 30%.
It is simple to do, assuming you can calculate the cost correctly
This strategy does not always take demand into account, such as if there is potential to charge more
Ensures you cover your costs and maintain a certain profit, especially if costs rise
It can be difficult to calculate all costs accurately i.e. overheads, fixed costs
Penetration pricing
Definition
A product is launched with a low price in order to gain sales quickly and gain market share. It is a way of trying to establish a product as a market leader or getting customers to try new products i.e. coke life.
Advantages
Customers are likely to return to a business which offers them a so called bargain, along with this the business will catch a good name for themselves
Marketplace dominance : competitors re typically caught off guard by a penetration pricing stratergy and have little time to react. The company is able to utilise this opportunity and make as many customers switch brands as possible
Disadvantages
Pricing expectation : customers often expect prices to stay low when a business uses a penetration pricing stratergy, therefore if prices gradually increase customers may become dissatisfied and stop purchasing the product or service
Damage brand image: the low prices may make customers perceive the brand imagine as cheap or poor quality
Low customer loyalty : penetration pricing often attracts bargain hunters who are likely to switch to competitors products if they find a better deal
Competitive pricing
Definition
This is matching a competitors price and trying to compare yourself to others and show what you can offer at good value. This is usually where there are few big dominant brands and price can be important on choosing a product i.e. Topshop
Advantages
Competitive pricing is simple as all it requires is some basic research and data collection about your competitors' products and pricing
Can be used in conjunction with other pricing strategies e.g. cost-plus pricing
Is extremely low-risk because it is likely that the competitors are well-known players in the market and have been around for quite some time, therefore the prices that are set are unlikely to go wrong if you base it according to them
Disadvantages
When you are implementing a competitor based pricing model you'll be missing out on the details which your competitors might have. If they go wrong your business will go wrong aswell. This could take a hit on the businesses profits and revenues in the future
Not long term as competitors may be basing their prices off on their own marketing strategy in attempts to focus on different market segments.
Will stop the business from standing out as essentially it is just copying its competitors, becoming 'one amongst the herd'.
Destoryer pricing
Definition
Is used to eliminate competition. It involves a business setting a very low price in order to attract customers away from competitors, who will struggle to match the low price and eventually go bust. Usually only large businesses can use this pricing strategy as they can withstand the losses for a longer period of time than a small business can (this pricing strategy is illegal in the UK)
Promotional pricing
Definition
Is a short term pricing strategy where prices are reduced for a period of time using discounts, vouchers and special offers. This strategy is often used to gain media interest or clear obsolete stock, for example during January sales.
Psychological pricing
Definition
It is used to make customers perceive the price of a product is lower than it actually is. For example, charging £9.99 for a product instead of £10, the customer will perceive the product as being less than £10 and that they are recieving a good deal. This could ultimately secure the sale.