Business & ManagementIB


Price...Different pricing strategies...The main factors affecting pricing strategies are costs, the market and competition...Cost-plus pricing: involves calculating the average cost
Price in the four Ps

Different pricing strategies

The main factors affecting pricing strategies are costs, the market and competition.

Cost-plus pricing: involves calculating the average cost of production of a product and adding a MARK-UP for profit.

Market-oriented pricing: deciding on the price based upon an analysis of the conditions in the market at which a product is aimed. These pricing strategies are suited for market-oriented businesses.

Penetration pricing: this is used by businesses trying to gain a foothold in a market, either with new or established products. The idea is to lower the price and thus encourage retailers and customers to purchase the goods in larger quantities. This is done as consumers become more encouraged to develop the habit of buying the product so that when prices eventually rise, they will continue purchasing the product. Because of its high costs, this strategy is used by well established businesses or by new businesses who are willing to make losses in short run.

Market skimming: involves charging high price for a new product for a limited period. The aim is to gain as much profit as possible for a new product while it remains unique in the market. It means usually targeting the most profitable segment of the market first, and then selling it to the wider market at a lower price. There are two reasons for market skimming: maximisation of revenues before competitors come up with substitutes and generating revenue in short periods so that investments in the product can be made later.

Loss leader: these are products priced at very low levels in order to attract customers (lower than the average costs of production). The company thus makes a loss on every product that is a loss leader. However, business expect that the loss made on loss leaders will be more than compensated by the additional profit from selling other products.

Price discrimination: this pricing occurs when a firm offers the same product at different prices when consumers can be kept separate. It can be time based (e.g., the price of train ticket may depend on time of the day) or market based (e.g., different prices for different market segments, like when students can get a discount on laptops).

Psychological pricing: a common example is charging just a little lower than a round figure ($9.99 instead of $10), believing that this will influence the customer’s decision to buy the product.

Price leadership: occurs in markets where businesses are reluctant to set off a price war by lowering the prices and are concerned about a falloff in revenue if prices are raised. They examine competitor’s prices and choose a price broadly in line with them. It also occurs that one business dominates the market and acts like a price leader, with other firms follow the pricing policy of that company. Companies following going rate will often be very frustrated that they cannot influence the prices of their product. Therefore, the strategy is fierce branding to differentiate the product create brand loyalty among consumers. Consequently they will have larger flexibility when determining prices.

Predatory pricing: the aim is to eliminate opposition, by cutting prices for a period of time long enough for the rivals to go out of business ( in many countries it is forbidden by law).


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