Using different pricing strategies for a range of business contexts
| Pricing strategy | Explanation | Example |
| Cost plus | Cost plus is where a business considers how much a product has cost them to produce, and then adds a mark-up to how much profit they want to make. If a business had costs of 拢10 for a product, and a cost-plus margin of 25%, they would need to sell the product for 拢12.50 | Cost plus is commonly used by retail businesses, this could include food shops and clothes shops for example. This ensures that a business makes their desired profit, however, it does not consider what competitors charge for similar products. Often businesses have different organisational structures and levels of expense that would lead to different prices |
| Competitive | Competitive is where a business considers what their competitors are charging for a product or service, based on this, they will decide their pricing strategy | Competitive pricing is very popular where a range of business are selling the same or very similar products. Electrical items such as mobile phones and televisions often base their pricing on competitors鈥 prices. Often, they may charge the same, or very slightly less than competitors. If a business knows they have a higher quality product or service, they may charge more than their competitors |
| Penetration | Penetration pricing is when a business charges a very cheap price to begin with, in order to build interest in a product or service | Penetration pricing is often used for products and services that are new. For example, a new line of breakfast biscuits prices at 拢1 per pack, whereas most established competitors might charge 拢2 per pack. After a while, the business would increase the price of the new brand to match its competitors |
| Skimming | Skimming is where a business sets a high price when an item is new in the market, or an updated version is released. After a period of time, the price starts to reduce in order to keep demand high | Skimming is a popular pricing strategy with items such as TVs and mobile phones. Businesses make very high profit margins off early adopters, eg people who queue up to purchase a new release. Often, the majority of potential customers are priced out of purchasing the items in the first weeks or months |
| Psychological | Psychological pricing is where business price products that make customers believe they are paying less than they really are, it makes items seem cheap | Psychological pricing examples include where a business would charge 99p instead of 拢1, or 拢9.99 instead of 拢10 to make items seem cheaper to customers. This is a popular pricing strategy with many different kinds of businesses, from flights to restaurant food. Often, this will lead to an increase in sales for businesses, however most businesses now use this method so the competitive advantage is small. |
| Loss leader | Loss leader is where a product or service is sold at a loss (less than it cost them to produce) in order to bring customers to a business. The idea is that once a customer is attracted to the business, eg inside a shop. they will purchase other, high profit items. | Products that use the loss leader pricing strategy are usually either low value items, or items that have related products that are sold with a high profit margin. Some products, such as printers are sold at a loss, but related items such as printer ink, are sold with a very high profit margin. Similarly, a coffee machine business may sell the machines at a low price, but sell the coffee pods with a very high profit margin. |
| Discrimination | Price discrimination is where different customers are charged different prices for the same products or services. | Price discrimination is very common with for example ticket sales for concerts, trains, and flights. Price discrimination can also often be related to age, employment status and location; for example a student may be provided with special discounts and unemployed people may be provided with a discount. This often leads to high sales for businesses as they may price based on the level of demand, however it can put customers off or mean that when prices are low, only a small profit is made. |
| Pricing strategy | Cost plus |
|---|---|
| Explanation | Cost plus is where a business considers how much a product has cost them to produce, and then adds a mark-up to how much profit they want to make. If a business had costs of 拢10 for a product, and a cost-plus margin of 25%, they would need to sell the product for 拢12.50 |
| Example | Cost plus is commonly used by retail businesses, this could include food shops and clothes shops for example. This ensures that a business makes their desired profit, however, it does not consider what competitors charge for similar products. Often businesses have different organisational structures and levels of expense that would lead to different prices |
| Pricing strategy | Competitive |
|---|---|
| Explanation | Competitive is where a business considers what their competitors are charging for a product or service, based on this, they will decide their pricing strategy |
| Example | Competitive pricing is very popular where a range of business are selling the same or very similar products. Electrical items such as mobile phones and televisions often base their pricing on competitors鈥 prices. Often, they may charge the same, or very slightly less than competitors. If a business knows they have a higher quality product or service, they may charge more than their competitors |
| Pricing strategy | Penetration |
|---|---|
| Explanation | Penetration pricing is when a business charges a very cheap price to begin with, in order to build interest in a product or service |
| Example | Penetration pricing is often used for products and services that are new. For example, a new line of breakfast biscuits prices at 拢1 per pack, whereas most established competitors might charge 拢2 per pack. After a while, the business would increase the price of the new brand to match its competitors |
| Pricing strategy | Skimming |
|---|---|
| Explanation | Skimming is where a business sets a high price when an item is new in the market, or an updated version is released. After a period of time, the price starts to reduce in order to keep demand high |
| Example | Skimming is a popular pricing strategy with items such as TVs and mobile phones. Businesses make very high profit margins off early adopters, eg people who queue up to purchase a new release. Often, the majority of potential customers are priced out of purchasing the items in the first weeks or months |
| Pricing strategy | Psychological |
|---|---|
| Explanation | Psychological pricing is where business price products that make customers believe they are paying less than they really are, it makes items seem cheap |
| Example | Psychological pricing examples include where a business would charge 99p instead of 拢1, or 拢9.99 instead of 拢10 to make items seem cheaper to customers. This is a popular pricing strategy with many different kinds of businesses, from flights to restaurant food. Often, this will lead to an increase in sales for businesses, however most businesses now use this method so the competitive advantage is small. |
| Pricing strategy | Loss leader |
|---|---|
| Explanation | Loss leader is where a product or service is sold at a loss (less than it cost them to produce) in order to bring customers to a business. The idea is that once a customer is attracted to the business, eg inside a shop. they will purchase other, high profit items. |
| Example | Products that use the loss leader pricing strategy are usually either low value items, or items that have related products that are sold with a high profit margin. Some products, such as printers are sold at a loss, but related items such as printer ink, are sold with a very high profit margin. Similarly, a coffee machine business may sell the machines at a low price, but sell the coffee pods with a very high profit margin. |
| Pricing strategy | Discrimination |
|---|---|
| Explanation | Price discrimination is where different customers are charged different prices for the same products or services. |
| Example | Price discrimination is very common with for example ticket sales for concerts, trains, and flights. Price discrimination can also often be related to age, employment status and location; for example a student may be provided with special discounts and unemployed people may be provided with a discount. This often leads to high sales for businesses as they may price based on the level of demand, however it can put customers off or mean that when prices are low, only a small profit is made. |