1.3.3 Pricing Strategies

Penetration

🔗 Initially setting a low price at the launch of a product to attract sales, then increasing it over time

• Attract high sales volume, higher revenues, increased profitability, and increased market share. Can then re-invest profits.

Skimming

🔗 Setting a high initial price when launching a product to take advantage of those who want to be the first to purchase it, then lowering the price over time

• High sales revenue per sale

Competitive

🔗 Setting a price similar to competitors who sell rival products

• Customers base purchasing decisions on product not price, can increase sales if the product is good quality

Predatory

🔗 Setting very low prices to try and drive rivals out of the market and create barriers to entry for new businesses

• Develop a competitive advantage, attract more customers

Psychological

🔗 Making the price appear cheaper than it is, so consumers think it's a better value for money. 📝E.g. £9.99 instead of £10.00

• Encourages more customers to purchase products, higher sales

Cost plus

🔗 Setting a price based on the cost of production and adding a percentage mark-up

• Provides a consistent rate of return, helps to achieve break-even point faster

Factors that determine the most appropriate pricing strategy for a particular situation

Product differentiation and USPs

• More USPs = consumers will be willing to pay a higher price as the business stands out from competitors

Level of competition

• Less competition and fewer substitutes mean the business will have more control over price

Strength of brand

• A strong brand means businesses can charge premium prices. A weaker brand will need a more competitive pricing strategy

Price elasticity of demand

• Businesses with price inelastic products have more of an ability to raise prices, whereas elastic will be more wary of raising prices

Stage in the product life cycle

• Pricing strategy will change as the business moves throughout the cycle

Costs and the need to make a profit

• May lower prices to gain sales (penetration)

Changes in pricing to reflect social trends

Online sales

• Consumers now have access to a wider choice of products online, so businesses with physical shops may lower their prices to try and compete with online businesses

Price comparison sites

• Consumers can easily find cheaper substitutes; this can reduce the business' competitiveness if they are less price competitive.