C2 Pricing Strategies
Pricing Strategies refer to the decisions behind setting the appropriate price for products. This may be after consideration of costs, consumers, competitors or the type of product.
Penetration pricing refers to the decision to set a low price when first launching a product onto the market. Once a market is established and the product is becoming popular, the price can be raised to a price more in line with other products on the markets. This strategy is suitable for new products that are entering very competitive markets. Offering a low initial prices gives consumers an incentive to try the product instead of an already popular one offered by a competitor.
Market skimming refers to the decision to set a high price when first launching a product onto the market. Once the customers who are willing to pay a high price have purchased the product, the price is then lowered to appeal to a wider range of customers. This method ensures that each customer pays the highest amount they are willing to pay for the product. This supports the business in recouping high costs incurred in the development stage of the product life cycle. This strategy is most appropriate for products where a lot of money has been spent in development such as computers, smart phones and game consoles.
Competitor-based pricing refers to the decision to set prices based on what other competitors are charging. This is most appropriate in markets where there are lots of competitors selling similar products. This strategy can avoid a price war, where one business dropping their prices leads to competitors also dropping theirs and the benefits of the price drop are not achieved. In very competitive markets. firms may decide to use non price competition such as promotion or product adaptations.
Cost-plus pricing refers to the decision to set prices by calculating the cost of making the product and adding a ‘mark-up’. A mark-up is a set amount or a percentage added to the cost. This method ensures that the price covers costs.