1.3.3 Pricing Strategy Flashcards
What are the 6 pricing strategies?
- Cost Plus
- Price Skimming
- Psychological Pricing
- Predatory Pricing
- Competitive Pricing
- Price Penetration
What is cost-plus pricing?
Setting a price by adding up a markup percentage to the cost of making the product
What is the formula for cost-plus pricing?
CPP= Unit cost +(mark up percentage x unit cost)
What is price skimming?
- Where the business sets a high price for a new product/service when it is first introduced to the market
Effective when an established brand is introducing a new product into the market e.g. apple
(The business will then gradually lower the price to ensure sales continue)
What is price penetration?
- Business sets a low price for a new product/service when it is first introduced
Effective when business wants to quickly capture market share & attract price-sensitive customers (once have enough customers businesses will start to raise the price)
What is predatory pricing?
- Business sets prices so low that it drives out its competitors out of the market
This strategy is illegal in many countries
What is competitive pricing?
- Business sets its prices based on its competitors prices
Effective when business is in a highly competitive market & wants to maintain market share
What is psychological pricing?
Often ends in £0.99
Pricing strategy takes into account customers emotions,beliefs & attitudes towards product/service
What factors are there to consider when choosing a pricing strategy?
- Number of USPS/ amount of differentiation
- Price elasticity of demand
- Level of competiton in the market
- Strength of brand
- Stage in product lifecycle
- Costs & the need to make a profit
Why is the number of USPs/amount of differentiation important to consider when choosing a pricing strategy?
Products with many USPs & high differentiation can command higher prices
Why is PED important to consider when choosing a pricing strategy?
Business needs to consider the PED when setting its prices:
- Businesses should set lower prices if product is elastic
- Businesses should set higher prices if product is inelastic
Why is level of competition in the business environment important when choosing a pricing strategy?
- In highly competitive markets businesses may need to set their prices low to remain competitive
- In less competitive markets businesses may be able to set higher prices
e.g. the budget airline industry is highly competitive & airlines keep their prices lowe to increase demand
Why is the strength of the brand important when choosing a pricing strategy?
- A strong brand with a loyal customer base can command higher prices
Why is a products stage in the product lifestyle important when choosing a pricing strategy?
In the introduction stage, prices may be set lower to attract customers & build market share
In growth stage, prices can increase as demand for the product increases
In maturity stage prices may need to be lowered again
Why are the costs & the need to make a profit important when choosing a pricing strategy?
- Prices must cover the cost of production & provide a reasonable profit margin
