Pricing Strategies
Price is one of the all important Four Ps, or, if you're an examiner, the Marketing Mix.
The way a business prices its products is obviously going to have a big impact on its profits. Set the price too high and customers might not pay it; set the price too low and you may not even cover your costs.
Make sure you are able to describe the following pricing strategies:
Price Skimming (or Price Creaming) - This strategy is often used when a business brings out a new piece of technology. They price the product at a very high price to give it an impression of being of excellent quality. Of course, they know that people can't afford the high price (apart from footballers and posers!), so they eventually reduce the price to something more reasonable. And then we all think we've got a bargain. Clever eh?!
Penetration Pricing - This is used normally when a product first penetrates (or enters) the market. It used to get people's attention and try to get people hooked early on. New magazines often use this, where the first issue is 99p, but then future issues are £3.99.
Loss Leaders - This is when a business advertises a product at a seemingly ridiculous low price to tempt you into their shop. It's normally used by supermarkets, in the hope that while you're in their store buying the cheap product, you'll also spend your hard-earned cash on other products. They also hope that you'll come back next week, thereby obtaining your Brand Loyalty.
Competitive Pricing - This is when businesses price their products at a similar price, or just lower than, their competitors. Tesco, Morrisons and Asda are constantly using this price strategy.
Psychological Pricing - This is when businesses mess with your mind (Psycho!!!). They price their products to make them seem cheaper than they really are (£1.99 instead of £2.00 etc).
Cost Plus Pricing - This is a very simple pricing method. Businesses simply work out how much it cost to make the product and then add a bit on for profit. The problem is, however, that the price you end up with may not be very competitive.
Make sure you are able to describe the following pricing strategies:
Price Skimming (or Price Creaming) - This strategy is often used when a business brings out a new piece of technology. They price the product at a very high price to give it an impression of being of excellent quality. Of course, they know that people can't afford the high price (apart from footballers and posers!), so they eventually reduce the price to something more reasonable. And then we all think we've got a bargain. Clever eh?!
Penetration Pricing - This is used normally when a product first penetrates (or enters) the market. It used to get people's attention and try to get people hooked early on. New magazines often use this, where the first issue is 99p, but then future issues are £3.99.
Loss Leaders - This is when a business advertises a product at a seemingly ridiculous low price to tempt you into their shop. It's normally used by supermarkets, in the hope that while you're in their store buying the cheap product, you'll also spend your hard-earned cash on other products. They also hope that you'll come back next week, thereby obtaining your Brand Loyalty.
Competitive Pricing - This is when businesses price their products at a similar price, or just lower than, their competitors. Tesco, Morrisons and Asda are constantly using this price strategy.
Psychological Pricing - This is when businesses mess with your mind (Psycho!!!). They price their products to make them seem cheaper than they really are (£1.99 instead of £2.00 etc).
Cost Plus Pricing - This is a very simple pricing method. Businesses simply work out how much it cost to make the product and then add a bit on for profit. The problem is, however, that the price you end up with may not be very competitive.
Demand & Supply
You will also need to know about Demand & Supply. That's the thing we learnt about how people often want (demand) more of a product when the price goes low, and less of the product when the price goes high.
The problem, however, is that suppliers & manufacturers want to supply (or sell) as many products as possible when the price is high. If the price falls, they may decide to stop supplying the product and start to make something else instead.
The point where everybody is happy is known as the Market Pricem or Equilibrium Point.
Key Point - if you get asked to draw a Demand & Supply graph, remember that the Demand line goes Down,
The problem, however, is that suppliers & manufacturers want to supply (or sell) as many products as possible when the price is high. If the price falls, they may decide to stop supplying the product and start to make something else instead.
The point where everybody is happy is known as the Market Pricem or Equilibrium Point.
Key Point - if you get asked to draw a Demand & Supply graph, remember that the Demand line goes Down,