Pricing Strategies PDF

Pricing strategy introduction Once a product has been developed, a price will then needed to be decided upon A strategy is the medium to long term plan of the business and the pricing will need to fit with the business objectives The pricing strategy will depend on many factors, for...

Pricing strategy introduction Once a product has been developed, a price will then needed to be decided upon A strategy is the medium to long term plan of the business and the pricing will need to fit with the business objectives The pricing strategy will depend on many factors, for example: The product or service itself Competitors in the market e.g. Heinz ketchup The aims and objectives of the business How would you price Hellman’s Ketchup? #1 Cost plus pricing A cost-plus pricing strategy seeks to set a price for a product or service which covers the costs AND provides a good profit margin for the business Cost-plus is the most logical approach to pricing because it achieves the business objective of maximising profits Many Young Enterprise teams work out their projected profits by using cost-plus pricing  #1 Cost-plus benefits and drawbacks Protects the profit margins of the business Easiest method of pricing to apply Easy to estimate profit levels This method of pricing does not take into account the prices of the competition #2 Skimming pricing A skimming price strategy is used when launching a new product The price is set high to start, this will create high profits and may be used to pay back high Research and Development (R&D) costs Usually used in technological or very innovative products which have few competitors As competitors eventually enter the market the price is then reduced Why are games consoles an example of skimming pricing? #2 Skimming benefits and drawbacks A high starting price can establish an upmarket image For innovative products it can be a great way to harvest high profits from early buyers who want the latest gadget / item / product and are prepared to pay a premium Cheaper imitations of the product may appear on the market too soon and take sales away from the product Risky strategy as customers may be put off from buying due to the high price #3 Competitive pricing Some products or services are priced in line with competitors This means that customers will have to judge a product or service on “non-price” methods such as; quality of customer service or range of products stocked Strategy usually used where products in a market are all very similar #3 Competitive benefits and drawbacks Useful in a market where one brand is dominant, the other brands would need to discount and offer lower prices encourage customers to buy Pricing at the competitive rate may not cover all the costs of some smaller businesses which can’t get the same economies of scale as the larger ones #4 Penetration pricing This means setting prices really low on a new product to encourage sales and to persuade customers to try the product. Then when they like the product and have to keep buying it the business raises the price Low prices should gain the business more market share (market penetration) Mass market – repeat purchases e.g. tea bags, biscuits which are called Fast Moving Consumer Goods (FMCG). New product A) £2.50 B) 75P C) £5 #4 Penetration benefits and drawbacks Works best with new products being launched to encourage consumers to try the product Consumers may have bought anyway, even without the low start price Expensive as it eats into profits by reducing sales revenue #5 Predatory Pricing In oligopolies (markets with just a few large businesses e.g. budget airlines) existing businesses may hold off the threat of a new entrant to the market by lowering their prices so that any competitor cannot make a profit. This is when aggressive price cutting is used to deter competitors or push them out of the market Depends on the strength of the brand, if customers are loyal they can continue to charge very low prices #5 Predatory pricing benefits and drawbacks The intention with predatory pricing is to drive competitors out of the market place or set a barrier to entry to discourage new entrants to the market Depends on the price elasticity of the product, if it is low then a lower price won’t make much difference to customer demand #6 Psychological pricing Psychological pricing means £1.99 rather than £2.00 to appear cheaper, the idea is that customers read the lower price (1) and treat it as lower than it actually is (2) Some businesses consider pricing carefully as it is often an indicator of quality, if products or services are perceived to be “too cheap” by customers then the value will be lost Another psychological pricing trick is the false time constraint, for example: buy today only 12 left! Which is cheaper 50% off or buy one get one free? #6 Psychological benefits and drawbacks Ideal for products which want to project a premium image – the price might be part of the appeal Psychological pricing strategy can be high risk, if comparable products are available for a lower price consumers could be tempted away PROMOTIONAL PRICING DISCOUNTS AND SALES—Businesses often cut prices for a short period. For example , in the USA many retailers discount their products on 'Black Friday'. PSYCHOLOGICAL PRICING—One common pricing strategy is to set the price slightly below a round figure - charging £99.99 instead of £ 100. Consumers are 'tricked ' into thinking that £ 99.99 is significantly cheaper than £ 100. LOSS LEADERS—Some products are sold at a price lower than cost. These are called a loss leader and are popular with supermarkets. The objective of this strategy is to draw customers into a store. Once in the store , it is hoped that customers buy other products that will generate a profit.