Pricing Methods

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    Pricing Methods

    Cost Plus Pricing

    • Adding a mark-up to unit costs. The mark-up is usually a % of the unit cost. This method is common with retailers.
    • Ignores market conditions
    • Difficult to identify precisely all the costs associated with the production of a product- particularly for a multi-product business.

    Price Skimming

    • Launch a product into a market charging a high price for a limited period. The aim of this strategy is to generate high levels of revenue with a new product before competitors arrive and exploit the popularity of a new product whilst it is unique.
    • It is a common method with technical products.
    • Helps such companies recover high development costs.
    • As the price is lowered, other customer groups are drawn into the market.
    • The higher price also helps to elevate the image of a product.
    • However, skimming can only be used if demand is price inelastic.

    Penetration Pricing

    • Introduce a new product and charge a low price for a limited period. This strategy is to try and help the business get a foothold in the market.
    • Businesses using this strategy hope that customers are attracted by low price, then repeat buy when the price rises.

    Penetration pricing has several benefits:

    • It is particularly beneficial when products are targeted at middle or low-income customer groups as such groups are more likely to be responsive to low-price introductory offers.
    • Can grow sales of new product lines very quickly. Usually, the lower the introductory offer, the faster the sales.
    • Fast growth in sales may allow a business to lower production costs by exploiting economies of scale.
    • Can put pressure on rivals, they may have to lower their prices to try to differentiate their products.

    Predatory Pricing

    • Predatory pricing or destroyer pricing aims to eliminate competitors from the market.
    • It involves charging a very low price for a period until one or more rivals leave the market
    • Some forms of predatory pricing are illegal in the UK and EU.
    • This is when a business is selling a product below the cost of production deliberately to force a competitor out of the market. It is outlawed because in the long run it can lead to a lack of competition in the market.
    • As a result of all the competitors leaving the market the predator can raise the price beyond the initial level.
    • Such low-price strategies are allowed if low-cost businesses are prepared to endure low profit margins for extended periods of times.
    • They can also be used to sell stocks that would otherwise remain unsold or as a means of breaking into a new market.

    Competitive Pricing

    • Operating in a fiercely competitive market.
    • One approach is to charge the same price as competitors. The advantage of this strategy is that a price war is likely to be avoided. It is considered to be a safe pricing strategy.
    • Another approach is for the market leader to set the price and all others follow.
    • This is called price leadership. Price leaders are usually dominant within the market, they may have developed their dominance through being a low-cost operator or perhaps by building a strong brand over a period.

     

    Psychological Pricing

    • Set the price slightly below a round figure- charging £99.99 instead of £100.
    • Consumer are “tricked” into thinking that £99.99 is substantially cheaper than £100.
    • This approach targets consumer who are looking for bargains. It is not likely to be used by businesses selling “up market” products.

    Factors that determine the most appropriate pricing strategy for a situation

    • Differentiation and USP
    • Price elasticity of demand
    • Amount of competition
    • Strength of the brand
    • Stage in the product life cycle
    • Costs and the need to make a profit

    Changes in pricing to reflect social trends:

    • Dynamic pricing
    • Auction sites
    • Personalised Pricing
    • Subscription Pricing

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