- A pricing strategy is the approach businesses use to determine what prices they should charge customers for their products
- Choosing the right pricing strategy is essential for a business to be profitable, competitive and successful in the long run
- Price can play a significant role in the market positioning of the brand and help a firm to compete with rivals
Diagram: The main Pricing Strategies (Requested edit)
Businesses can choose from a range of pricing strategies to suit the products they sell and the customers at which they are aimed
Different Types of Pricing Strategies
Pricing Strategy
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Explanation
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Advantages |
Disadvantages
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Cost plus
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- The business calculates the cost of production and then adds a markup to determine the final price
- The markup covers the cost of production plus the business's desired profit margin
- This pricing strategy is commonly used by manufacturers that produce standardised goods e.g. washing machines
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- A simple and quick methods of calculating a price for a product
- It ensures that a profit is made on each item sold
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- It does not consider the needs of the market
- The pricing approach of competitors is ignored
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Skimming
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- The business sets a high price for a new product when it is first introduced to the market
- The business will then gradually lower the price to ensure sales continue
- Skimming should not be confused with premium pricing, where a permanently high price gives customers an impression of high quality and luxury
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- This is effective when an established brand is introducing a new product and there is a high demand for it e.g successive models of Apple's Macbook Air
- The high price helps the business to recover its development and marketing costs quickly
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- Less useful for new brands as it requires significant customer trust
- Loyal customers may become tired of paying high prices for new product versions and look to see what competitors offer
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Penetration
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- The business sets a low price for a new product/service when it is first introduced
- This helps to quickly capture market share and attract price-sensitive customers e.g. many new perfumes launch using penetration pricing
- Once they have enough customers, the business will start to raise the price
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- Customers are attracted to buy the product at a low price leading to high sales volume and market share
- Competitors unable to match or beat the low price are forced out the market leading to less competition
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- Customers may perceive that the product is of low quality if the product is sold at a low price
- Selling at a low price limits the amount of profit made
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Competition
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- The business sets its prices based on its competitors' prices
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- This is effective when a business is in a highly competitive market and wants to maintain its market share
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- The business must continually monitor its competitors' prices and adjust its prices accordingly to remain competitive
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Promotional pricing
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- This pricing strategy takes into account the customer's emotions, and compulsive behaviours in responding to price promotions
- E.g. a business may have a Bogof offer - buy one get one free
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- Generates high volumes of sales for a limited period
- Can be a useful tool to catch the attention of customers
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- Profit margins are likely to be lower during price promotions
- Customers may be unwilling to pay a higher price once a price promotion comes to an end
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