Pricing Strategies

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  • Pricing Strategies
    • Customer based pricing
      • Penetration pricing
        • Penetration pricing is the pricing technique of setting a relatively low initial entry price, usually lower than the intended established price, to attract new customers.
        • The aim ofpenetration pricing is usually to increase market share of a product,providing the opportunity to increase price once this objective has been achieved.
      • Price skimming
        • Skimming involves setting a high price before other competitors come into the market.
        • Price skimming as a strategy cannot last for long, as competitors soon launch rival products which put pressure on the price
      • Loss leaders
        • The use of loss leaders is a method of sales promotion. A loss leader is a product priced below cost-price in order to attract consumers into a shop or online store.
        • The purpose of making a product a loss leader is to encourage customers to make further purchases of profitable goods while they are in the shop.
      • Predatory pricing (illegal)
        • With predatory pricing, prices are deliberately set very low by a dominant competitor in the market in order to restrict or prevent competition.
      • Psychological pricing
        • They will buy something for £9.99, but think that £10 is a little too much. So a price that is one pence lower can make the difference between closing the sale, or not!
        • The aim of psychological pricing is to make the customer believe the product is cheaper than it really is.
      • where prices are determined by what a firm believes customers will be prepared to pay
    • Cost-based pricing
      • Cost-plus / Mark-up pricing
        • widely used in retailing, where the retailer wants to know with some certainty what the gross profit margin of each sale will be.
        • An advantage of this approach is that the business will know that its costs are being covered.
        • The main disadvantage is that cost-plus pricing may lead to products that are priced un-competitively.
      • price is determined by adding a profit element on top of the cost of making the product.
    • Competitor-based pricing
      • Going-rate
        • setting a price that is in line with the prices charged by direct competitors.
        • An advantage of using competitive pricing is that selling prices should be line with rivals, so price should not be a competitive disadvantage.
        • The main problem is that the business needs some other way to attract customers. It has to use non-price methods to compete
      • where competitor prices are the main influence on the price set
    • Price affects sales. Lowering the price of a product increases customer demand.
    • Too low a price may lead customers to think you are selling a low quality ‘budget product’.

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