Marketing mixPricing 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?

Breaking into a

market

Increasing market share

Make profits

Pricing strategies: AN OVERVIEW

Cost-plus pricing

COST OF MANUFACTURING THE PRODUCT PLUS A PROFIT MARK-UPFor example:Cost of manufacturing 10000 bars of chocolate= £ 1000(i.e) cost of manufacturing 1 bar = £ 10If 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 %

outputADVANTAGE: 1. This method is easy to apply2. Cost of manufacturing is

coveredDISADVANTAGE:3. 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:a. Understand the

competitor’s price and set its price accordingly

b. Ensure that it sells more than the competitor

c. 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 skimmingADVANTAGE1. Help establish a product in the

market2. Consumers might assume the

product to be of a good qualityDISADVANTAGE:1. 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) pricingLow 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 timeUseful 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.

High quality = high price

Just below a whole number

Good value for money

Price Leadership and Price TakingA 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.