1.3.3 Pricing Strategies Flashcards
(17 cards)
What is the price?
Money charged for a product or service
Why is pricing unlike the other elements if the marketing mix?
It effects revenues rather than costs,
Why is pricing so important?
- competitive weapon to help a business exploit market opportunities
- must be consistent with the other elements of the marketing mix since it contributes to the perception of the product or service by customers
- setting a price or high or low could limit business growth or even cause serious problems for sales and cash flow
- pricing is hard to get right, many factors involved, and uncertainty
What does the law of demand state?
For nearly all products, the higher the price the lower the demand
What are the 6 pricing strategies?
- cost plus pricing
- competitive pricing
- skimming pricing
- penetration pricing
- predatory pricing
- psychological pricing
What us cost plus pricing?
Setting the price by working out the cost of production for a product or service and adding a percentage markup on top which is the profit margin
What are the benefits and drawbacks of cost plus pricing?
✅simple, straight forward, ensures cost are covered and profit is made
❌not competitive or in line with customer expectations
❌doesn’t take into account market demand, competition or customer value
What is competitive pricing?
Based on what the competitors are charging, meaning customers will have to judge products on ‘non price’ methods such as quality, customer service or better availability
What is skimming pricing?
A product is priced high to begin with with as it has a desirability factor that will mean customers will want it when it’s new, usually applies to tech with a shirt product life cycle (soon to be replaced by a new model)
What are the drawbacks if skimming pricing?
- cannot last for long as competitors take action to compete that put pressure on the price
- distribution can be a challenge for innovative new products, it may be necessary to give retailers high margins to convince them to stock the product, reducing the improved margins delivered by price skimming
What is penetration pricing?
Setting prices low on a new product to encourage sales, and to persuade customers to try the product and then when they like the product and keel buying it the business increases the price, low prices should gain more market share, used in mass markets for repeat purchases e.g. tea bags, biscuits which are called fast moving consumer goods (FMCG)
What are the advantages of penetration pricing?
- catching competition off guard / by surprise
- encouraging word of mouth recommendation for the product because of the attractive pricing (making promotion more effective)
- forces the business to focus on minimising unit costs right from the start (productivity and efficiency are important)
- the low price can act as a barrier to entry to other potential competitors considering a similar strategy
- sales volumes should be high, so distribution should be easier to obtain
What are the disadvantages of penetration pricing?
- the low initial price can create an expectation of permanently low price amongst customers who do switch, it is always harder to increase prices than to lower them
- pene traction pricing may simply attract customers who are looking for a bargain rather than customers who will become loyal to the business and its brand
- the strategy us likely to result in retaliation from established competitors who will try to maintain their market share
What is predatory pricing?
- hold off the threat of a new entrant by lowering their prices so that any competitor cannot make a profit
- aggressive price cutting is used to deter competitors or push them out of the market
- intention is to drive competitors out if the market of set barrier to entry to discourage new ones
What does predatory pricing depend on?
- price elasticity of the product if it is low lower prices won’t make a difference
- the strength if the brand
- the financial strength if the brand
What is psychological pricing?
- pricing a product at £1.99 instead of £2 to appear cheaper
- some businesses consider pricing carefully as it is often an indicator of quality
- high value or status items like luxury cars avoid pricing just below but instead may price higher to match their customers expectations
- a form of psychological pricing is premium pricing, marketing tool to set prices higher for certain goods in the hope that the higher price will give the impression the good is of higher quality
Factors that determine the most appropriate pricing strategy for a particular situation
- differentiation and USP
- price elasticity if demand
- amount of competition
- strength of brand
- stage in the product life cycle
- costs and the need to make a profit
