AS Business || Winter 2021

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Resources:
1. AccountingTools
2. SheerID

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1.3.3 4 PRICING STRATEGIES 💵

Types of pricing strategy

1. Cost plus / gross margin pricing

Takes all the known costs of production and adds a percentage mark up to
calculate the selling price. Under this approach, you add together the direct
material cost, direct labor cost, and overhead costs for a product + a markup
percentage to derive the price

+ Works good in contracts since supplier had no downside risk

+ Can result in seriously overpriced product (or limits innovation)
+ Ignores market environment
+ Costs can fluctuate, cannot constantly change the price; expenses can be too
high, causing net losses and does not guarantee profit itself because sells may
be insufficient
 2. Price skimming 👑
Short-term strategy that allows firms to recover relatively high R&D costs to enable
profit. Takes advantage of those wanting to be the first to purchase, usually set for
innovative, but lower quality than premium products
+ Profit maximisation, covers development costs
- Timing is critical: should not hold high price for too long (customers
waiting for a drop in price)
- Can decrease customer loyalty if price drop to “normal” is too fast and
products have low differentiation

3. Penetration 🧒
Charging a lower price to attract customers + gain a market share

4. Predatory 🦁
When business sells goods or services at a very low price / below cost price as it can
take the costs, however its opponents can't

5. Competitive 🏅
Setting price of a product as the same / similar level as rivals
+ Better positioning of the business, prevents the loss of market share and
allows you to respond to every move of your competitors
+ Gains customer base and price-conscious customers, value for money
+ Can maximise profit margins

- Focus shifts on a product: more and better, includes balancing costs of

packaging, distribution, advertising
- Unsustainable in the long term: later you evolve your pricing strategy
based on the product and other lines, not on what others can offer
 - Seen as identical to everyone else
- Big companies benefit more, economies of scale
- Can’t see the wood for the trees - When you’re implementing a competitor
based pricing model you’ll be missing out on details which your competitors
might have. Because, if they went wrong, you go wrong as well.

6. Psychological 💓

Practice of setting prices slightly lower than a whole number to attract clients

7. Premium pricing
Sub-psychological pricing, a strategy of setting price higher in the belief that
customers will attach more importance to a product if the price is set at a
premium level
Examples are: Louis Vuitton, Rolex
+ Enhances brand identity, attaches value
+ High profit margin
- Difficult to forecast
- Low sales volume

8. Promotional pricing
Decreases price for a short time, the brand artificially increases the value of a product
or service by creating a sense of scarcity.
Encourages customer acquisition by encouraging cost-conscious shoppers to buy.
It can increase revenue, build customer loyalty and improve short-term cash flow

Includes: BOGOF (Claires), Coupons (some brands offer coupons to those who
abandoned a shopping cart), Flash Sales (slashing prices to unload excess inventory),
loyalty programs (tiers, free perks), seasonal tie ins (Cyber Monday, Black
Friday), segment-specific promotions (discounts for students, nurses)
 + Creates buzz, increases customer traffic (+ new cost conscious customers)
+ Moves excess inventory
+ Builds customer loyalty
+ Buying of additional, non discounted products from the business

Check:
● Economy Pricing – Setting a low price for low-quality goods.
● Penetration Pricing – Initially setting a low price for a high-quality
product and then increasing it.
● Price Skimming – Initially setting a high price for a new low-quality
product and then reducing it.
● Premium Pricing – Setting a high price for high-quality goods,
psychological

Factors that determine the most appropriate pricing strategy for a particular
situation
- Number of USPs / amount of differentiation (if high, skimming)
- Price elasticity of demand (necessity, proportion of customers income,
number of close substitutes, peak and off-peak demand, habit consuming)
- Level of competition in the business environment
- Strength of brand
- Stage in product life cycle (penetration to cost plus or competitive)
- Costs and the need to make profit
- Skills of worker / owner / managers and time they have
Changes in pricing to reflect social trends

⇒ Online sales
- Dynamic pricing - to fill capacity, benefit from lower PED
- Auction sites, bidding
- Subscription pricing (service or a product)

⇒ Price comparison sites - skyscanner, moneysupermarket,

google shopping

Depends on the customer type

What's the impact?

Ads Disads

● Small businesses can change and ● Bigger businesses have limited

adapt quickly, offer information capacity for fast change
about current marketplace ● Not all businesses and deals are
● If competitive / penetration highlighted, someone pays to be
pricing is used, these websites can in top lists
lead to an increase in sales (the
cheapest wins)
● Can be used in promotional
material
● Can focus promotion on wide
range of products and services as a
way to gain competitive
advantage and not try to compete
on price
5. Distribution

● Four stage: producer to wholesaler to retailer to consumer

● Three stage: producer to retailer to consumer
● Two stage: producer to consumer

Wholesaling - buy from manufacturers and sell to retailers. They bulk in bulk and
selling smaller bulks to retailers
Retailing - businesses