Pricing Strategies
This section explains Pricing Strategies covering, Types of Pricing Strategy, Factors That Determine the Most Appropriate Pricing Strategy and Changes in Pricing to Reflect Social Trends.
Types of Pricing Strategy
Pricing strategies determine how much a business charges for its products or services. The right strategy can influence sales, brand image, and profitability.
Cost-Plus Pricing
- Involves adding a mark-up to the unit cost to ensure a profit.
- Example: If a product costs £10 to make and the business wants a 20% mark-up, the price becomes £12.
Price Skimming
- Setting a high initial price for a new or innovative product to maximise profits before competitors enter.
- Common in tech markets (e.g. new smartphones or consoles).
- Price is gradually reduced over time.
Penetration Pricing
- Charging a low price to gain market share quickly, often used for new products.
- Once brand loyalty is built, prices may rise.
- Common in streaming services or new food brands.
Predatory Pricing
- Deliberately setting very low prices (possibly below cost) to force competitors out of the market.
- Often illegal or closely monitored by regulators due to its anti-competitive nature.
Competitive Pricing
- Setting prices in line with or just below competitors.
- Often used in highly competitive markets like supermarkets.
- Focus is on non-price factors (e.g. customer service, quality).
Psychological Pricing
- Setting prices that appear cheaper to consumers, e.g. £9.99 instead of £10.
- Creates the perception of better value and can increase conversions.
Factors That Determine the Most Appropriate Pricing Strategy
Choosing the right pricing strategy depends on a range of internal and external factors:
| Factor | Impact on Pricing Strategy |
|---|---|
| Number of USPs / Differentiation | More unique features = greater ability to use premium pricing (e.g. skimming). |
| Price Elasticity of Demand | Inelastic demand allows higher prices; elastic demand may require competitive or low pricing. |
| Level of Competition | Intense competition may force competitive or predatory pricing. |
| Strength of Brand | Strong brands can charge premium prices (lower elasticity). |
| Stage in Product Life Cycle | Introduction: skimming or penetration. Maturity: competitive or cost-plus. |
| Costs and Profit Needs | Must cover costs and meet profitability targets – influences mark-up size or cost-plus pricing. |
Changes in Pricing to Reflect Social Trends
Modern business practices must adapt to shifts in consumer behaviour and digital environments.
Online Sales
- Online platforms increase price transparency and competition.
- May lead to more dynamic pricing (adjusting prices in real time).
- Lower overheads online can also allow for more competitive pricing.
Price Comparison Sites
- Encourage consumers to search for the cheapest option, pushing businesses to price competitively.
- May reduce brand loyalty and increase price sensitivity.
- Businesses may respond with psychological pricing or exclusive online promotions.
Summary
| Pricing Strategy | When It’s Used |
|---|---|
| Cost-Plus | Stable costs, predictable demand |
| Price Skimming | Innovative, high-demand product with little initial competition |
| Penetration | New product aiming for fast adoption |
| Predatory | Gaining market dominance (legally risky) |
| Competitive | Highly saturated market |
| Psychological | Increasing conversions through price perception |
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