2.2.2 Competing on price

    COMPETITIVE Pricing is based off what competitors  charge to keep appeal There is a guarantee of some market share and sales if market price is accepted They may not be able to cover their costs if focused on competitive pricing Used in a market with homogeneous products, or one with many substitutes
    COST PLUS This is the cost of raw materials with a calculated mark-up on each product Reduces uncertainty if the product is sold as seller knows that costs will be covered As price is not competitive it could lead to a fall in quantity sold, revenue and market share Can be used when the seller wants to know the gross profit margin in advance
    SKIMMING (PREMIUM) This is a short-term technique used when competition is low. High prices are set initially Can gain quick profits when beginning with a new product Can lead to lack of customers as they are deterred by the high prices Used in new markets, or with new products that have differentiated features
    PENETRATION Low prices are used initially, which are raised after customer loyalty is gained They can gain market share quickly, and can enter the market more easily They may make a large loss through these low prices Used by new firms when entering the market to gain market share
    PREDATORY Low prices are set, taking losses to drive other firms out of business Able to reduce competition in the market and therefore maintain their market power Could possibly make a large loss from their predatory prices Used in oligopolistic markets, by large firms to prevent new firms from entering
    PSYCHOLOGICAL Uses emotional responses to prices as a good priced at 99p may seem cheaper to a customer than £1 Could increase sales revenue which leads to a gain in market share May not have the intended effect – pointless Can be used on cheaper/smaller products (chocolate) to encourage impulse purchases

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


    USP: Having a unique selling point (USP) or having a differentiated product means that a firm gains competitive advantage over rivals as consumers are willing to pay more for new features e.g. Bluetooth earphones are more expensive than normal earphones as people are willing to pay more.

    No. of competitors: The level of competition is important as in a market with little competition, consumers will have to pay high prices as there are no alternatives If the product has many substitutes (in a competitive market), high prices will lead to less sales as customers will go to competitors with cheaper products, this is when competitive pricing comes into play.

    Strength of brand: The strength of a brand affects customer loyalty as large and well-known brands can charge higher prices as people are willing to pay for the name-brand product. An example would be the high cost of Nike sportswear which is similar in quality to other smaller brands but is quite expensive. For such brands, PED is inelastic.

    Stage in product life cycle: The stage in the product life cycle strongly influences the prices, as a new product entering the market will use either penetration pricing (in competitive market) or use price-skimming (with no competition). On the other hand, in growth/maturity phases competitive pricing is likely to be used to sustain market share.

    Costs/need to make profit: The overall costs will be important as if profit is essential, firms will make the decision to use strategies such as cost plus to ensure that costs are covered. If profit is not an immediate necessity, they will use penetration pricing to gain profit long-term by sacrificing their initial profit margins. This may depend on when fixed costs or loans must be paid in.

    PED: The elasticity of a product affects which pricing strategy to use as elastic products will have to use competitive pricing to ensure demand doesn’t fall whilst inelastic products will use premium pricing/skimming as the price will not affect demand as strongly.


    Changes in pricing to reflect social trends

    • Online retailers have meant that as there are no storefront costs and less staff needed, this will lower fixed costs therefore lowering prices for consumers.

    As well as this, the growth of price-comparison websites means that customers are closer to gaining perfect information, allowing them to find cheaper prices. This then means that more firms must charge lower prices as they will lose customers otherwise.


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