Pricing Strategies GCSE Business Studies tutor2u™ Revision Presentations 2004

Introduction Pricing = deciding what price to set for products and services What is a price? What the buyer is prepared to pay in exchange for a product or service Price – often called something else; e.g. Fee Fare Rent Subscription

Price and the Marketing Mix Price is a very important part of the marketing mix Price directly influences profits by creating revenue rather than affecting costs Price helps a business “differentiate” its product or service compared with other, similar products E.g. High price = better quality? E.g. Low price = better value / lower quality? The price that is set must be consistent with everything else in the marketing mix E.g. a high-priced product needs to have features/benefits that customers feel justify paying more

Price and Marketing Objectives Main objective of setting the right price = generate the level of sales that meets the objectives of the business Possible objectives that influence price-setting: Maximising profits Maintaining or increasing share of a market Entering a new market and getting a product/service accepted by customers in the new market Increasing sales volume (e.g. to make more efficient use of production)

Pricing Strategies Cost-plus pricing Setting a price by adding a fixed amount or percentage to cost of making product Penetration pricing Setting a very low price to gain as many sales as possible Price skimming Setting a high price before other competitors come into market Predatory pricing Setting a very low price to knock out all other competition Competitor pricing Setting a price based on competitors prices Price discrimination Setting different prices for same good, but to different markets e.g. peak and off peak mobile phone calls Psychological pricing Setting a price just below a large number to make it seem smaller e.g. £9.99 not £10

Pricing to Enter a New Market Difficult to get pricing right when entering a new market Market likely to have well-established competitors Customers in the market already have perceptions about what the right prices are How can a business attract attention to their product/service? What kind of messages are sent to customers by asking for a low/medium/high price? How will existing competitors in the market react? Will there be a “price war” If first into market then Price Skimming may be the right strategy If trying to enter and build share of a well-established market – then Penetration Pricing may be best

Product Life Cycle and Pricing The Product Life Cycle Describes how sales of a product change over time Various phases – introduction; growth; maturity; decline Price needs to change depending on the stage of the product life cycle E.g. launch phase For a new market with few competitors. Then price can be high E.g. growth phase More competitors and higher sales volume; price likely to be lower

Loss Leaders A product offered at a loss to entice customers to visit a shop or website. The hope is that customers will either : Purchase other products at the same time, Or become longtime / loyal customers to make up for the loss. Advantages Loss leaders can be just a few products in a much wider range - but the customer has the impression that the whole range is great value Good method of short-term pricing Disadvantages Customers come to expect low prices on these products