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(2.2.2) Competing on Price - Coggle Diagram
(2.2.2) Competing on Price
Price Strategies
Cost Plus Pricing
Based on assessment of costs, topped up by percentage for profit.
If a business wanted to make 20% profit with an avg cost per unit of £10, they would set the price at £12, this is referred to the mark up.
Price skimming
Charging a very high initial price for the product.
Product has to be unique with little to no competitors
Time limited as competitors will see the success in it and make similar products.
Penetration Pricing
Lowering price when introducing a new product to encourage customers to buy compared to competitors.
After sales rise, price will rise as well, hoping consumers will continue to buy compared to their competitor's product.
Predatory Pricing
Setting a very low prices to encourage people to buy your product compared to consumers.
Wait until competitors are destroyed
Increase pricing
Psychological
pricing and marketing strategy based on the theory that certain prices have a psychological impact.
A common example of Phycological pricing is "charm" pricing
This is a price signal that suggest a better value e.g. £9.99 rather than £10
This approach is thought to increase sales by upto 30%
Changes in pricing to reflect social trends
Loyalty Cards
Customers with a loyalty card/ points may get items for a lower price to encourage them to stay with that business.
Factors determining most appropriate pricing strategy
price elasticity of demand
A business facing price elastic demand will avoid changing price as outputs demanded will fall.
Leading to less profit than they would have been originally making.
A business facing price inelastic demand can have higher prices and demand for output will only change slightly.
Frequently inproving products reinforce differentiation and price inelasticity e.g. apple’s phone models.
Number of USPs/amount of differentiation
Nearly all businesses try to differentiate their product from their competition
Success in this means customers will base their buying decision on more than price.
Strength of Brand
A strong brand allows a business to set premium, higher prices.
Substitutes become less acceptable so demand become less price elastic.
costs and the need to make a profit
New businesses frequently need time to become established to reach profitability.
Insufficent finance to fund unprofitable early years will most likely lead to rapid failiure.
stage in the product life cycle
Confident businesses may try skimming at an introduction stage.
Most businesses start with competitive pricing.
Penetration pricing may be effective in the groth and maturity stages.
Competition
Competition is linkaed with PED
Having rivals with similar products means your product will have an elastic price.
This is why differentiation is important so price isnt the only factor consumers take into consideration, making your product less elastic m