133 Pricing Strategies AS Edexcel New Specification 2015 Business By Mrs Hilton for

Lesson Objectives To be able to identify and discuss a range of pricing strategies To be able to discuss factors that determine the most appropriate pricing strategy To be able to explain why pricing needs to be changed to reflect social trends To be able to answer sample exam questions based on the topic area

Guidance from Edexcel

From the specification a) Types of pricing strategy: cost plus (calculating mark-up on unit cost) price skimming penetration predatory competitive psychological b) Factors that determine the most appropriate pricing strategy for a particular situation: number of USPs/amount of differentiation price elasticity of demand level of competition in the business environment strength of brand stage in the product life cycle costs and the need to make a profit c) Changes in pricing to reflect social trends: online sales price comparison sites

Starter What are these? What are their USP? How should they be priced? Link to webpage Link to video

Pricing strategies Here are the main ways that any business might decide on what price to make their products or services… Cost-plus Competitive Skimming <creaming> Penetration Predatory Psychological

Cost – plus pricing The cost to produce the products are worked out then money is added on top. There are two ways of doing this Add a profit margin in £ Add a % percentage mark-up on top of the cost of making the product

Competitive pricing Some products or services are priced in line with competitors. This means that customers will have to judge a product or service on “non-price” methods such as; quality of service or speed. Have a look at Jack Rabbits café Students could work at computers or just brainstorm non-price ways that Deb can compete on Non-price factors. Some suggestions; speed of service, unusual menu items such as pancakes or gallettes maybe flavoured drinks (hazelnut latte) or frappes. They could come up with a list of ways that they could be different. Vegetarian, vegan, organic local, home made etc. Some cafes do a free book exchange and others have a small shop attached. This way she can keep profits high and still have a good turnover. The example above is a café that makes aga cooked food and has a small deli to one side of the café. The food is unusual and arrives on bread boards – their speciality is rustic food like brie and fig sandwiches on home made crusty bread.

Skimming or creaming pricing A product is priced high to begin with as it has a desirability factor (novelty) that will mean customers will want it when it is new. E.g. iphone 6+, ipad, iWatch Usually applies to technology items with a short product lifecycle (soon to be replaced with a new model)

Penetration pricing This means setting prices really low on a new product to encourage sales and to persuade customers to try the product. Then when they like the product and have to keep buying it the business raises the price. Low prices should gain the business more market share. Mass market – repeat purchases e.g. tea bags, biscuits which are called fast moving consumer goods (FMCG). 3 min video on penetration prices

Predatory Pricing In oligopolies or monopolies existing businesses may hold off the threat of a new entrant by lowering their prices so that any competitor cannot make a profit. When aggressive price cutting is used to deter competitors or push them out of the market this is known as destroyer pricing The intention is to drive competitors out of the market place of set barrier to entry to discourage new ones Depends on the price elasticity of the product, if it is low then a lower price won’t make much difference Depends on the strength of the brand, will consumers switch or stay loyal? Depends on the financial strength of the firm can they afford to cut prices? Example: Amazon Example Wal-Mart

Psychological pricing This means pricing a product at £1.99 rather than £2.00 to appear cheaper. Some businesses consider pricing carefully as it is often an indicator of quality. If customers were to buy a cheap baby car seat they may consider this to be a risk, but if it is expensive or competitively priced against other similar products the customer may be assured of its quality and reliability. High value or status items like luxury cars avoid pricing just below but instead may price higher to match their customers’ expectations. Bbc video of cheap car seat test

number of USPs/amount of differentiation price elasticity of demand Factors that determine the most appropriate pricing strategy for a particular situation number of USPs/amount of differentiation Non-price competition e.g. level of service price elasticity of demand Whenever you have a question on pricing think elasticity as the two go hand in hand. Reducing the price can lead to higher revenue if the market is very price sensitive level of competition in the business environment No business works in isolation so a change in the price of one business may result in the change of all the others

stage in the product life cycle Factors that determine the most appropriate pricing strategy for a particular situation strength of brand; strong the brand the higher price can be charged. How much is Heinz ketchup vs ASDA own label? Link stage in the product life cycle Products in the saturation or decline phase may be priced lower to clear stocks before a new product is introduced. Interactive product life cycle link costs and the need to make a profit

Changes in prices to reflect social trends Online sales Food ordering online is trending, which may see the death of the weekly shop at massive out of town hypermarkets, shoppers can easily compare prices of dozens of similar products Products will need to have stronger branding or lower prices to persuade consumers to switch Price comparison sites Customers are now able to shop around and using these sites compare prices of insurance, where previously they would have had to phone a few companies to get quotes. This was time consuming and an expensive phone bill. They work by heavily advertising and the companies pay to be featured in a list. Uswitch Go compare Money supermarket Article on BBC on problems with price comparison sites

Plenary game Pricing Yachts interactive game: http://www.aisr.org/ibinfo/IBBaccpack/Marketing_student/page_183.htm Ideal for whiteboard activity at the end of a lesson

Sample question 1 20 marks – case material on next slide Application 4 Evaluation 6 Knowledge 4 Analysis 6

Answer question 1

Answer question 1

Answer question 1

How to level the 20 mark sample question No evaluation – mark stays at Level 1

Sample question 2 8 mark question Taken from legacy unit 1 June 2010 Case study on next slide

Answer question 2

Revision Video

Glossary Cost-plus; To set the price of a product or service by calculating the cost then adding a set amount or % to it. Competitive pricing; To charge a similar amount for goods as are charged elsewhere Mark-up; The amount above cost added to a product before it is placed for sale