4.2 MARKETING – PRICE IB BUSINESS & MANAGEMENT A COURSE COMPANION P

PRICING STRATEGIES The pricing strategies adopted by businesses can be divided into three main categories:  Cost-based pricing  Competition-based pricing  Market-Based pricing

Cost Based Strategies Cost-plus Pricing This method is very commonly used by businesses as it easy to calculate and understand. It simply involves working out the average cost per unit produced (total cost divided by output) and then adding a percentage mark up. Eg: If a company makes 100 products at total cost of $1000, its average cost per unit is $100. It may decide that it wants a profit margin of 25%, meaning the selling price would be $125. The higher the percentage mark up, the more profit per unit. This strategy is also known as full cost pricing or absorption pricing.

Competition-based Pricing Price Leadership Price leadership exists where a dominant organization in a market sets a price for its products and its rivals feel compelled to match that price. This may be because there is one large business in the industry coupled with lots of smaller competitors with far less market power to set prices It can also be seen in oligopolistic markets (markets with a few large businesses) where the leaders all tend to match each other’s prices.

Competition-based Pricing Price Leadership (continued) Example Petrol/gas stations will often have policies where they agree to match local rivals prices. This practice has brought about claims of illegal agreements by businesses to fix prices at an artificially high level and exploit customers However, it is very hard to prove that this collusion has actually occurred.

Market-based Pricing Price Penetration Price penetration is where a business sells it products at a low price to try to break into a market and gain market share quickly. The aim of this policy is to gain enough market share to be able to raise prices in the future once the business has become established.

Market-based Pricing Price Skimming This is most commonly seen with new and innovative products, such as new mobile phones and games consoles. The price is set high initially to gain those customers who will pay almost any price to get their hands on the latest gadget. Once the business has profited from selling to those customers, it drops the price to tempt other customers who may have been put off by the high price originally. It is only able to do this because there is likely to be almost no competition in the market due the cutting edge nature of the product.