Term 3 Week 2

In your group, discuss which price strategy is being used in each of the examples below:

• A watch that’s very similar to others sold in the shops
• A toy sold for $1.95
• A tour operator sells holidays during the school holidays as well as at other times.
• A new brand of washing powder is launched - there are several similar ones already available
• A supermarket wants to cover the cost of vegetables and make a 100% profit as well.
• A new mobile phone has been developed that has extra features compared to the competition

• Pricing Strategies

  Cost-Plus Pricing

  • The business takes into account the cost of manufacturing the product and then adds on a profit mark-up. This can either simply cover costs or include an element of profit. It focuses on the product itself and does not take into account consumers’ expectations or perceptions. It is very easy to apply but the business may lose sales if their price is more than competitors.

  
  

  Penetration Pricing

  This is where the business sets the price lower than the competition to ‘penetrate the market.’ This is often useful when launching into a new or highly competitive market. It is typically used with mass market products – chocolate bars, food stuffs, household goods, etc. It is also suitable for products with long anticipated product life cycles.

  Other benefits:

  • Market share is quickly won. 
  • Encourages consumers to develop a habit of buying 
  • ‘Low’ price to secure high volumes
  
  

  Price Skimming Strategy

                                                                                  

  This is where the business sets an initial high price for a unique product encouraging those who want to be ‘first to buy’ to pay a premium price. Later in the products life cycle they may then lower the price. It is usually used alongside a promotional campaign to create high demand for the new product before it is even launched. This strategy helps a business to gain maximum revenue before a competitor's product reaches the market. This is often used with technology products like mobile phones and devices. 

  
  

  Loss Leaders

  This is where chosen goods/services are deliberately sold below cost to encourage sales elsewhere in the business. The business hopes that the purchases of other items more than covers ‘loss’ on item sold. It is typically used in supermarkets, e.g. at Christmas, selling bottles of coke at $0.99 in the hope that people will be attracted to the store and buy other products as well that will cover the loss made on the coke. Cell phones & contracts are another example.

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  Psychological Pricing.         

  This when particular attention is paid to the effect that the price of a product will have upon the consumers perceptions of the product. It may involve charging a very high price for a high quality product so that high income customers may wish to purchase it as a status symbol. E.g. Ferrari. Alternatively, it may charge a more reasonable or lower price so that consumers perceive it as an ‘affordable’, ‘value for money’ product.

  Another example of psychological pricing is selling products for $199 instead of $200 is also an example of psychological pricing as it creates the impression of being much cheaper.
  
  

  Promotional Pricing

  This is when products might be sold “on sale” or at a lower price for a short period of time. It includes “buy 1 and get 1 free” deals.  It is useful for getting rid of unwanted stock. It could help renew interest in a business if sales are falling. The challenge for businesses is that the lower price also reduces sales revenue and  profits.