Pricing is a key competitive weapon and a very flexible part of the marketing mix. The purpose of making a product a loss leader is to encourage customers to make further purchases of profitable goods while they are in the shop. A loss leader is a product priced below cost-price in order to attract consumers into a shop or online store. The use of loss leaders is a method of sales promotion. This can give competitors more time to develop alternative products ready for the time when market demand (measured in volume) is strongest. It may be necessary to give retailers higher margins to convince them to stock the product, reducing the improved margins that can be delivered by price skimming.Ī final problem is that by price skimming, a firm may slow down the volume growth of demand for the product. the launch of rival products to the iPhone or iPod).ĭistribution (place) can also be a challenge for an innovative new product. Price skimming as a strategy cannot last for long, as competitors soon launch rival products which put pressure on the price (e.g. There are some other problems and challenges with this approach: Good examples of price skimming include innovative electronic products, such as the Apple iPad and Sony PlayStation 3. Such products are often bought by "early adopters" who are prepared to pay a higher price to have the latest or best product in the market. This is often used for the launch of a new product which faces little or no competition – usually due to some technological features. Skimming involves setting a high price before other competitors come into the market. Penetration pricing is often used to support the launch of a new product, and works best when a product enters a market with relatively little product differentiation and where demand is price elastic – so a lower price than rival products is a competitive weapon. However, there are some significant benefits to long-term profitability of having a higher market share, so the pricing strategy can often be justified. In the short term, penetration pricing is likely to result in lower profits than would be the case if price were set higher. Penetration pricing is most commonly associated with a marketing objective of increasing market share or sales volume. The strategy aims to encourage customers to switch to the new product because of the lower price. Penetration pricing is the pricing technique of setting a relatively low initial entry price, usually lower than the intended established price, to attract new customers. The aim of penetration pricing is usually to increase market share of a product, providing the opportunity to increase price once this objective has been achieved. You often see the tagline "special introductory offer" – the classic sign of penetration pricing. If the mark-up percentage is applied consistently across product ranges, then the business can also predict more reliably what the overall profit margin will be. The main advantage of cost-based pricing is that selling prices are relatively easy to calculate. the selling price of £24 less the bought cost of £10). This is equal to a total mark-up of £14 (i.e. So, if the wholesale cost of a product is £10 per unit, the retailer will look to sell it for 2.4x £10 = £24. In the UK a standard retail mark-up is 2.4 times the cost the retailer pays to its supplier (normally a wholesaler). How high should the mark-up percentage be? That largely depends on the normal competitive practice in a market and also whether the resulting price is acceptable to customers. Here is an example of cost-plus pricing, where a business wishes to ensure that it makes an additional £50 of profit on top of the unit cost of production. The main disadvantage is that cost-plus pricing may lead to products that are priced un-competitively. An advantage of this approach is that the business will know that its costs are being covered. In some ways this is quite an old-fashioned and somewhat discredited pricing strategy, although it is still widely used.Īfter all, customers are not too bothered what it cost to make the product – they are interested in what value the product provides them.Ĭost-plus (or "mark-up") pricing is widely used in retailing, where the retailer wants to know with some certainty what the gross profit margin of each sale will be. This involves setting a price by adding a fixed amount or percentage to the cost of making or buying the product. Let's take a brief look at each of these approaches There are three main approaches a business takes to setting price:Ĭost-based pricing: price is determined by adding a profit element on top of the cost of making the product.Ĭustomer-based pricing: where prices are determined by what a firm believes customers will be prepared to payĬompetitor-based pricing: where competitor prices are the main influence on the price set
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