Pricing Strategies

Pricing Strategies

• Cost Plus Pricing - Involves business working the cost of producing one unit of a product out and then adding a percentage for profit. Sometimes called mark-up pricing. It's simple to use, and ensures a profit's made. 
  I.E - if a product costs £6 and the mark-up's to be 200% then £12 will be added onto the cost, making the total price £18

• Contribution Pricing -  Ensures that variable costs of production are met. Any extra will be a contribution to the company's fixed costs or overheads. For example, if the variable cost of producing a doll is £12 and its sale price is £25 then the contribution to overheads from each doll produced is £13.

• Price Discrimination - This involves charging different prices to different groups of consumers for the same level of service. Used extensively in the transport sector. 

• Promotional Pricing - Used extensively in supermarket sector. May involve introductory offers or a special offer/promotion.

• Psychological Pricing - Using prices like £9.99 to try & convince consumers they're paying less and getting a bargain. 

• Price Skimming - Strategy used often by technology businesses (Apple is an example) when they introduce a new product. They begin by charging a high price to recover their research & development costs. Over time price is gradually reduced to appeal to a mass market.

• Penetration Prices - Involves introducing a new product at a lower price. Collectors' magazines generally use this technique for the first issue of a series to encourage consumers to continue purchasing the whole series when the price rises.

• Predatory/Destroyer Pricing - This may be used by large firms who are trying to force smaller competitors out of business. This is illegal, but it's hard to prove however.

Selecting the Right Method!

This is important strategic decision for a business. Choosing the right pricing method will help attract and retain consumers in the short & long term. Because of the Internet & other methods consumers are much more aware of prices so businesses need to take this into consideration when selecting a price strategy.