A business can adopt new pricing strategies:
To try to break into a new market
To try to increase its market share
To try to increase its profit
To make sure all its costs are covered and a target profit is earned
Different methods of pricing
Cost-plus pricing: the cost of manufacturing the products plus a profit mark-up
Benefits:
Easy to apply
Different profit mark-ups could be used in different markets
Makes sure that the price covers all of the costs
Limitations:
Lose sales if the selling price is higher than competitor's price
Total profit will only be made if all products are sold
No incentive to reduce costs
Competitive price: when the product is priced in line with or just below the competitor price
Benefits:
Price is at realistic level
Avoids price competition ( reduce profit of other businesses in the industry)
Used when it is difficult for consumers to tell the different between products of different businesses
Limitations:
Lower price than costs of production , lead to losses being made
Hard to give a higher quality imagine
Detail research cost time and money
Penetration pricing : when the price is set lower than the competitors prices in order to enter a new market.
Benefits:
New launched products to create an impact
Ensure that product enters the market successfully
Market share build up quickly
Limitations
Profit may be low
Customers might reject the product is price increase
Might not be appropriate for the brand with high quality products
Price skimming : where high price is set for a new product on the market
Benefits:
Establish the product as being high quality
Increase profit rapidly
Helps recover research and manufacture costs
Limitations:
Discourage consumer from buying the product
Encourage more competitors
Promotional pricing : when a product is sold at a very low price for a short period of time (*not a pricing strategy )
Benefits:
Helps to sell off unwanted stock
Renew interest in a product if sales are falling
Limitations:
The revenue will be lower
Might lead to a price competition with competitors
Impact of psychology on price decisions:
High price for a high quality product may mean that high-income customer wish to purchase it as a status symbol
If price set below a whole number, it create the impression of being cheaper
Supermarkets may charge low price for products that are purchase for a regular basis for impression of being given good value for money.
Repeat sales when the price reinforces consumer's perception
Using different pricing method for the same product
Dynamic pricing: when the businesses change product prices, usually when selling online depending on the level of demand
Customers can be split into two or more groups -> charge with different prices for the same product or service.
Businesses do this because the price sensitivity of these group are different
Price elasticity of demand:
Price elastic demand : where consumer are very sensitive to changes in price
Prices increase by 5% the sales decrease by 15% = falling revenue for the business
Price inelastic demand : where consumer are not sensitive to changes in price
Prices increase by 15% the sales decrease by 5% = increasing revenue for the business
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