2.2.2 Competing on price Flashcards
What are the different pricing strategies?
- Cost plus pricing
- predatory pricing
- penetration pricing
- price skimming
What is cost plus spricing?
Where a firm will calculate their total costs of producing the good or service then add a % mark up to set their price. This ensures all costs are covered and the mark up is what contributes to profit.
What is price skimming?
Firms price their goods relatively high on introduction of the good/service to the market to target a segment of the market known as ‘early adopters’ who are willing to pay high prices for the good/service. Once the market has skimmed down they will reduce their prices.
What is penetration pricing?
Firms set their prices very low in order to penetrate market share and focus on increasing their sales. Opportunity cost of profit as likely to make a loss however usually a short term strategy to gain a foothold in the market.
What is predatory pricing?
Firms set their prices extremely low in order to drive competitiors out the market as they will be so price competitive that it may even lead to a loss so competitors will rationally decide to exit the market as there are no profits are made. Once the competitor leaves the market, the firm will increase their prices again to gain that monopoly power.
What factors affect the choice on pricing strategy?
- Number of USP’s / product differntiation
- PED
- Cost of making the product and level of profit required
- no. of competitors
- Stage in the product life cycle
- Strength of brand
Explain the no. of differentiated products / USP’s.
The more differntiated products a firm has the greater ability to charge higher prices as customers are willing to pay for the unique features of the product.
Explain PED
Firms with PED inelastic products can charge higher prices as demand isnt as responsice to changes in price. For PED elastic vice versa
Explain levels of competition
Greater competition in the market decreases producer surplus and consumer surplus increases as consumers have greater power of the suppliers with graeter choice. As a result price wars may occur and lower prices. On the other hand low levels of competition means more price setters and greater producer power
Explain stage of product in the life cycle
At introductory, firms may want to use price skimming to target early adopters however at the end of the product life cyle near the decline stage, prices are likelt to be dropped as another product enters the introductry stage which they may focus on this instead to be their cash cow.
Explain cost plus
If a firm has the objective of profit maximisation, may use cost plus pricing strategy to calulcate a %mark up in order to gain profits. However cost plus pricing can be very timely especially for a business selling a wide range of different products, so may not be most efficent pricing strategy.
