Pricing considerations
- Cost of production
- Competitor’s pricing
- Target Market
- Markup Target
- Overhead costs
- Brand
- Quality (mainly perception of quality)
- Image
- Stage in lifecycle
Pricing links with
- Adding value
- Gross Profit Margin
- Product Life Cycle
- Unit Costs
- Sales Forecasting- similar
- Elasticity of Demand
Methods, strategies, and tactics
Pricing method: The method used to calculate the actual price set
Pricing strategies: Adopted over the medium to long term to achieve marketing objectives. Have a significant impact on the marketing strategy.
Pricing tactics: Adopted in the short run to suit particular situations. Limited impact beyond the product itself.
Competitors significantly influence pricing
Price leaders set the pricing for a market - these tend to be the big businesses. Whilst smaller businesses tend to be price followers, who simply follow prices set by the leaders.
Price takers: Have no option but to charge the ruling market price Price makers: Able to fix their own price Price leaders: Market leaders whose price changes are followed by rivals Price followers: Follow the price-changing lead of the market leader
Mark up
Widely used in retail, the amount that you add to the price on top of your production costs.
Loss Leaders: A product or service sold at a loss to encourage people to enter the ecosystem of a product or service.
Benefits and drawbacks to using cost to influence price
Benefits
- Easy to calculate
- Price increases can be justified when costs rise
- Managers can be confident each product is being sold at profit
Drawbacks
- Ignores price elasticity of demand
- May not take account of competition
- Profit is lost if price is set below the cost of production
Price Skimming
- Setting a high price to maximize profit
- Works well for products that create excitement amongst “early adopters”
- Frequently used in the technology industry
- Product is sold to different market segments at different times, allowing for high initial profits
- Will maximize profit per unit to achieve a quick recovery of development costs
Price Penetration
- Setting a low introductory price
- Opposite of price skimming
- Aim is to
- Gain market share quickly
- Build customer usage and loyalty
- Build sales of high-priced related items (“hook and bait” approach)
- Price can be increased once a target market share is reached
Hook & Bait pricing: Selling a product for a very low price, but it requires another product to work. For example, a printer requires ink—so a company may sell a printer for a low price but then sell ink at a high price to recoup their money through people having to buy new ink.
Dynamic Pricing
Dynamic pricing is a pricing strategy in which businesses set flexible prices for products or services based on current market demands.
Amazon utilizes dynamic pricing, changing their prices on average every 10 minutes.