1.3.3 Pricing Strategies

Question 1

Price skimming

Answer 1

Sets high price temporarily - aim = get extra revenue with limited sales, high USP product e.g iPhone
+ extra revenue = recover from r&d costs
+ can charge premium price resulting in maximised profits
- only possible for limited amount of time
- competition will drive down price
Used for niche products in a niche market

Question 2

Penetration pricing

Answer 2

Sets low price with limited short term profit in order to build marketshare before switching to a more profitable price
+ gain market share quickly
+ build customer usage and loyalty
+ build sales of higher priced related items
- how much price increases depends on strength of brand loyalty
- competitors may reduce price
Used by products with little/ no differentiation - mass market

Question 3

Predator pricing

Answer 3

Sets very low often below cost of production, intended to drive competitors and new entrants out the market
Strategy used by established and financial stable business e.g plt Black Friday 99% off
+ drive out competition
+ more sales
+ more market share
+ can increase price later once have majority market share
- operating at a loss

Question 4

Competitive pricing

Answer 4

Price set at market price or following a price leader - similar products
+ reduction in price = more customers = increased sales
- competitors may set lower price
Happens in highly competitive markets - mass

Question 5

Psychological pricing

Answer 5

Strategy that gives an impression of value
+ Customers deceived - believe product cheaper & getting more for money
+ increased sales and profit
- extra cost to attract customer with eye catching low price tag

Question 6

Factors affecting how price is set

Answer 6

USP
- more differentiated = charge higher prices
PED/YED
- if sensitive to price changes = competitive pricing
Competition
- if market dominated by few large companies - competitive pricing, may choose predatory to remove comp and gain market share
Brand strength
- strong brand adds value allowing premium price
Product life cycle
- when launches onto market may choose skimming or penetration

Question 7

Social trends affecting how price is set

Answer 7

Online sales -
Price comparison sites

Benefits to customer
24 hours, buy at home, variety, less time consuming

Drawbacks to customer
Can’t try on or see quality, delivery, vulnerable card

Benefits to business
No overheads, can. target wider (international) Easier to set up

Drawbacks to business
Technical issues, need IT skills, easier for competitors to see, competitive market