6. Pricing strategies

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MANAGEMENT OF
MARKETING
PRICING STRATEGIES
LEARNING INTENTIONS/SUCCESS
CRITERIA
LEARNING INTENTIONS:
I understand the role of
PRICING as part of the
marketing activities of an
organisation.
SUCCESS CRITERIA:
• I can explain the factors
which will influence the price
at which an organisation
sells its products.
• I can describe the different
pricing strategies available
for businesses to use.
• I can suggest appropriate
pricing strategies for
different products
Why is Price Important?
If a business sets the wrong price for its goods or
services, they run the risk of losing customers or
not attracting customers in the first place.
If they set the price too high – customers may
go to a competitor to get better value for money.
If they set the price too low – the business may not
make enough profit to survive.
Factors which Influence Price
Before a business sets its selling price there are
many factors which they must consider, such as:
• The stage of the product life cycle
• Competitors prices
• The cost to provide the good or service
• The level of profit wanted
• The quantity of good or service to be
supplied
• The market segment that is being targeted
Factors which Influence Price
PRODUCT LIFE CYCLE
Goods and services at the beginning of the product life
cycle are usually priced higher as the demand is high
and research and development costs have to be
recovered.
As demand for a good or service falls, the price falls
Too and when goods are in the Decline Stage, prices
will be at their lowest to encourage sales.
Factors which Influence Price
COMPETITORS PRICES
A business must always keep an eye on the
price being charged by competitors as if
their price is higher than competitors they
may lose customers.
Factors which Influence Price
COSTS
A business must cover its costs in order to
break-even. This means that costs must be
calculated carefully and selling price set at
a level which covers these and gives a
percentage of profit too.
Factors which Influence Price
LEVEL OF PROFIT REQUIRED
If profit is an objective for the business, then
higher prices may have to be charged to
achieve this. However, this is not a
consideration for businesses in the Public
and Third Sectors.
Factors which Influence Price
QUANTITY TO BE SUPPLIED
Goods and services that are not provided in
large quantities will be priced higher than
those that are mass produced.
Factors which Influence Price
MARKET SEGMENT
If the market segment being targeted is high
income groups, goods and services will be
highly priced to indicate quality and luxury.
On the other hand if low income groups are
being targeted, lower prices will be charged
eg supermarket own brands.
PRICING STRATEGIES
There are many pricing techniques that businesses can
use. The technique used will depend of the power of the
business within the market in which it operates. The most
common techniques are:
• COST-PLUS PRICING
• DESTROYER PRICING
• LOSS LEADERS
• PREMIUM PRICING
• PENETRATION PRICING
• PRICE SKIMMING
PRICING STRATEGIES
COST-PLUS PRICING:
This is when the business bases its price on
the cost of buying or making the product or
providing a service, plus a ‘mark up’ percentage to
give profit.
DESTROYER PRICING:
This is when a business sets its prices very low,
often running at a loss in the short term. This
is used to ‘destroy’ the competition and become
the market leader.
PRICING STRATEGIES
LOSS LEADERS:
This is when a product is sold at a loss to attract customers
to buy other full-priced products eg fuel sold by
supermarkets.
PREMIUM PRICING:
This is where a high price is charged to convince
consumers that the product is an up-market, luxury
product. This will be reinforced through advertising and
promotion. Selling less at a higher price may be more
profitable than selling more at a lower
PRICING STRATEGIES
PENETRATION PRICING:
This is when new products are offered at low
prices when entering a new market and
once customer loyalty has been built up,
prices are increased. This is a risky
strategy as customers may not think that the
higher price is value for money after paying
such a low price initially.
PRICING STRATEGIES
PRICE SKIMMING:
This is when a business charges a high price
initially and then subsequently lowers its price.
This technique will be used by businesses who are
market leaders where there is no competition for
the product or service being provided eg new
technology products. They will lower the price
once competitors enter the market.
TASK
Now try Worksheet 28.
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