Marketing mix Pricing strategies

WHAT ARE PRICING STRATEGIES One of the most difficult, yet important, issues you must decide as an entrepreneur is how much to charge for your product or service.

A look into price Price will not be determined by just demand and supply. So what are the factors that will alter price? Brand name (external factor) Competitor’s price (External factor) Cost of production (internal factor) Willingness of the consumer to pay for a product or sevice

While there is no one single right way to determine your pricing strategy, the following will help you to understand the concept better

Why should a company adopt pricing strategies? Increasing market share Breaking into a market Make profits

Pricing strategies: AN OVERVIEW

Cost-plus pricing COST OF MANUFACTURING THE PRODUCT PLUS A PROFIT MARK-UP For example: Cost of manufacturing 10000 bars of chocolate= £ 1000 (i.e) cost of manufacturing 1 bar = £ 10 If the producer wants to make a 60% profit on the bar, he has to set the selling price at £ 10 + 60% of 10= £ 16

Selling price = total cost X mark-up % output ADVANTAGE: This method is easy to apply Cost of manufacturing is covered DISADVANTAGE: The firm could lose sales if the selling price is higher than the competitor’s

Penetration pricing When a firm enters a new market, it sets its price lower than the competitors’ price to be able to enter a new market. Company needs to: Understand the competitor’s price and set its price accordingly Ensure that it sells more than the competitor Makes its way into the market

Price skimming This is somewhat opposite of penetration pricing. Do you have a relatively new technology that nobody else is offering? Why not “skim” off the customers who are willing to pay more in the beginning. Once demand from the early adopters falls, you can then lower your prices.

Price skimming ADVANTAGE Help establish a product in the market Consumers might assume the product to be of a good quality DISADVANTAGE: Potential customers might be put off because of the high prices

COMPETITIVE PRICING Putting prices in-line with the competitors’ price. SONY XPERIA ARC = 27448 HTC HD7 = 27400

Predator (destroyer) pricing Low prices are set to drive a firm out of the market. Aims to reduce the number of competitors in the market.

PROMOTIONAL PRICING when the firm sets the price lower for a set amount of time Useful to clear off unsold and unwanted stock It can generate a new outlook to a failing business

PSYCHOLOGICAL PRICING Based on the attitude of a consumer towards a product, the company sets prices of the commodity. Just below a whole number Good value for money High quality = high price

Price Leadership and Price Taking A large company (price leader) sets a market price that smaller firms (price takers) tend to follow. In the petrol industry, price leadership is shared amongst a few major firms.