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Pricing Strategies, Methods and Tactics

Wednesday, January 2nd, 2008

Pricing strategies

These are necessary for new products.

  • Price Penetration involves entering your product into the market at a low price in order to gain high sales and gain some of the market share. The company doing so much have good financial stability in order to take little profit or even a loss on the product.
  • Competitive Pricing involves entering a new product into the market with prices set similar to that of the nearest competitors.
  • Price skimming involves releasing a new product into the market at a high price in order to make large amounts of revenue whilst the product is still new and capitalise on the little competition. Prices are usually lowered later on the keep demand high.

Pricing strategies are often used on products that are currently on sale in the market.

  • Price leadership occurs when the firm has a large market share, and they are the dominant force. The firm will alter their prices and their competitors will follow, allowing them to remain ahead and not loose sales due to lower prices elsewhere.
  • Price taking. This is the opposite of price leadership. It involves smaller firms setting their prices based on the levels set by the dominant market force. A good example is small electrical retailers setting their prices similar to the large electrical retailers active in many high streets around the country.
  • Predator pricing is an aggressive form of prices. It is done to wipe out, or severely weaken competition. It involves setting incredibly low prices to boost sales massively and cause competitors to suffer serious lack in sales, perhaps causing them to go bankrupt or downsize. A firm must have good financial backing in order to make a loss on the products sold cheaply. Firms can benefit however from the sale of their other products, gain in brand awareness and gains in market share.

Pricing Methods

Companies have many methods at which their prices are set. They vary from the product and market in question.

  • Cost plus pricing. This method adds a percentage of the unit cost to set a sale price. The percentage is often derived from the profit margin wanted from a company. For example, if a company wanted profits to be 20% higher than variable costs, a product that cost £10 to create could have a sale price of £12. This pricing method ignores customer wants and needs and other factors like the prices set by competitors.
  • Contribution pricing. This is done so any profit made on each product helps towards paying the company’s fixed costs, like rent, salaries etc.
  • Price Discrimination. This is when the same product is sold at different prices. A good example may be more expensive drinks at the weekend, cheaper train tickets outside of rush hours.

Pricing Tactics

Companies often have several tactics used when setting prices, after methods and strategies have been established.

  • Loss leaders. This is a tactic employed by larger firms with a vast range of products on sale. It involves selling products for a loss or for very little profit in order to gain sales on other products. A good example would be a supermarket chain selling groceries for little profit in order to boost sales of electrical goods and other non-food items.
  • Psychological pricing. This is common in almost every shop. Goods being sold for £4.99 rather than £5, as it creates a cheaper image in the customer’s mind. Other tactics like “was £20, now £15” are also often used, even though the price may have never changed – the customer just does not realise this and thinks they are getting a product cheaper.