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Pricing strategies - Coggle Diagram
Pricing strategies
Factors that affect pricing decisions
All other Ps in the marketing mix e.g. during a promotion price may be reduced
The price is often set to cover the cost of making the product (or buying from a wholesaler) and to make profit.
The price must be acceptable to customers and price depends on how price sensitive customers are.
Price elasticity of demand: takes into account the availability of substitutes, the type of product, the strength of the brand, etc.
The stage of the life cycle the product is in: e.g. if sales are declining price may be reduced.
Business objectives: price may reflect an objective like to increase market share, maximise profit, or keep brand image up market.
Level of competition in the market: if the price is set above that of a competitor without it being differentiated, then no one will buy it and may bring the business bad publicity. However if a price is too low, customers may question quality.
USP: Products with a strong USP can charge a higher price because it is highly differentiated.
Other types of pricing strategy
Cost - plus pricing
When a firm adds a percentage mark - up to the cost of making or buying a product.
For example: if a products unit cost is £30, the business might want to add a mark up of 25%, so it'll price it at £37.50
Predatory pricing
A method that is illegal under US and EU law.
Where a business will lower prices to force another business out the market, e.g. a large international business could do this to a small but successful business.
Competitive pricing
When a business monitors their competitors prices to make sure their own prices are set at an equal or lower level.
Super markets often do this with price matches and will refund the difference if another store is selling it cheaper.
Psychological pricing
Will base price off customers expectations
E.g. a high price indicates high quality
9.99 instead of 10 - it seems less to the customer
Promotional pricing strategies
Penetration pricing
The opposite of price skimming where prices are launched at a low price in order to gain customers or market share,
Benefits and drawbacks:
effective in price sensitive markets such as food.
Works well with large businesses that can utilise economies of scale: as they can benefit from lower costs when manufacturing large quantities of a product.
However, customers may always expect prices to be low, so it is difficult to raise prices without losing customers, and this can effect the brand image.
Price penetration can be used as an extension strategy to prolong a products life.
Can be used to target a budget concious market segment as well as one that is less budget concious, e,g, an airline might create a budget service (economy class) as well as keeping their premium priced product (first class) which maintains their customer base and keeps their premium brand image.
Price skimming
When new and initially innovative prices are sold at high prices when they first reach the market and are lowered over time.
High initial prices:
COnsumers will pay more because of the scarcity of the product, and the high price boosts the products image and appeal
Technological products such as iphones tend to be priced with this method.
Lowering prices over time:
Prices are generally dropped significantly as the product has been on the market for a year or so. By this point all consumers who are prepared to pay a higher price for the product will have purchased one.
Competitors may have also entered the market with imitative products at lower prices: although the business can prevent this using patents or trademarks
Benefits and drawbacks:
Benefits: makes the product appear exclusive when it first enters the market as it is innovative, meaning consumers will be prepared to pay a higher price for the product.
Drawbacks:
Potential customers can be put off by the initial high price
Customers who bought the product initially at a high price may feel frustrated when the price drops, potentially leading to a decrease in brand loyalty.
How changes in social trends affect price strategies
customers are using Online retailers
Online retailers need to be more price competitive, as its very easy for customers to compare prices for identical products compared to a physical store.
If there are many substitutes of a similar quality available, the cheapest online retailer will usually achieve the sale.
Online retailers may instead choose to compete with other aspects of financial pricing, like offering free returns.
These financial benefits may make the customer more willing to pay a higher price for the product itself.
Price comparison sites
Makes it easier for customers to compare the prices of a product across many different retailers and suppliers.
Saves customers time and effort in their search for the lowest price.
Forces retailers/suppliers to be more price competitive