A business can adopt price strategies for the following reasons:
- to try to break into a new market
- to try to increase its market share
- to try to increase its profits
- to make sure all its costs are covered and a particular profit is earned
Below are some pricing strategies that a business could use for its products:
Cost-plus pricing - the cost of manufacturing the product plus a profit mark-up.
(TOTAL COST / OUTPUT) x % MARK-UP = SELLING PRICE
Price skimming - where a high price is set for a new product on the market. This helps make the product desirable to people with large incomes. When the product has become established the firm will lower the price to help it become a mass-market product. It happens a lot with new technology.
Competitive pricing - when the product is priced in line with or just below competitors’ prices to try to capture more of the market. This happens when there is lots of choice and not much product differentiation - like petrol.
Promotional pricing - when a product is sold at a very low price for a short period of time. It helps to renew interest in a business if sales are falling, and also it is useful to get rid of unwanted stock. However, the sales revenue will be lower as the price of each item will be low.
Psychological pricing - when particular attention is paid to the effect that the price of a product will have upon consumers’ perception of the product. E.g. Instead of $50, $49.59.
