Pricing Strategy Overview

Pricing Strategy Introduction

• A pricing strategy is a medium to long-term business plan for pricing products.
• The pricing strategy depends on various factors:
  • Product or service characteristics
  • Competitors' pricing (e.g., Heinz ketchup)
  • Business aims and objectives.

Cost-Plus Pricing

• A cost-plus pricing strategy sets a price that covers production costs plus a profit margin.
• It's a straightforward approach for maximizing profits.
• Young Enterprise teams often use cost-plus pricing to project profits.

Cost-Plus Benefits and Drawbacks

• Benefits:*

• Protects the business' profit margins.

• Simple to apply.

• Easy to calculate profit levels.

• Drawbacks:*

• Doesn't account for competitor pricing.

Skimming Pricing

• Skimming pricing involves setting a high initial price for a new product.
• It's often used for technologically advanced or innovative products with few competitors.
• The goal is to recoup high R&D costs quickly and establish an upmarket image.
• Over time, the price is decreased as competitors enter the market.

Skimming Benefits and Drawbacks

• Benefits:*

• Establishes an upmarket image.

• Generates high profits from early adopters.

• Drawbacks:*

• Imitations from competitors may appear quickly.

• Customers might resist high initial pricing.

Competitive Pricing

• In this strategy, prices are set in line with competitors.
• Customers judge products based on non-price factors (e.g., quality of service, product range).
• Most effective when products in a market are highly similar.

Competitive Benefits and Drawbacks

• Benefits:*

• Useful where a single brand dominates the market.

• Encourages customer purchasing with discounts.

• Drawbacks:*

• May not cover all costs for smaller businesses without economies of scale.

Penetration Pricing

• This strategy sets low initial prices to attract customers to try a new product.
• This can generate higher market share rapidly, increasing sales volume.
• The hope is repeat business as customers become loyal.
• Common with consumer goods like tea bags and biscuits (FMCG).

Penetration Benefits and Drawbacks

• Benefits:*

• Encourages consumer product trial.

• Can generate rapid market share.

• Drawbacks:*

• Low profit margins in the initial stages.

• Reduced profitability due to lower sales revenue.

Predatory Pricing

• Used in oligopolies (markets with few dominant players) to deter new competition.
• Sets very low prices to make it unprofitable for rivals to enter.
• Often dependent on product demand elasticity to maximize effectiveness.

Predatory Pricing Benefits and Drawbacks

• Benefits:*

• Aims to eliminate competitors.

• Prevents new entrants in the market.

• Drawbacks:*

• Profitability depends greatly on price elasticity.

• May not be sustainable in the long run.

Psychological Pricing

• Strategy focuses on pricing items at amounts like £1.99 instead of £2.00 to seem a lower value than it's actual cost.
• Some businesses consider pricing as an indicator of quality.
• "Buy today - only 12 left!" or "50% off/ buy one get one free" are examples of psychological pricing techniques.

Psychological Pricing Benefits and Drawbacks

• Benefits:*

• Ideal for products looking to project an upmarket image.

• Drawbacks:*

• High risk if comparable products at lower prices are available.

• Customers might be tempted away by competitors.

Promotional Pricing

• This involves short-term price reductions or discounts.
• Common examples include Black Friday sales.
• 'Loss leaders' are goods sold below cost to draw customers into a store with hopes of purchasing other products.