Price

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In setting a price for a product the business will almost certainly want to cover its costs and make a profit as well.

Price Competition

Businesses have to decide whether to charge:

• A low price in order to attract sales.

• An average price, this means you have to compete with rivals by other means, e.g. quality, promotions.

• A higher price can be charged if the product is seen as being better than the rivals.

There are a number of different pricing strategies that the business could use. These are discussed below.

Non-Price Competition

Non-price competition occurs when businesses compete with each other in ways other than price, examples include:

• Providing a better service than a competitor, such as home delivery, after sales care and opening for longer hours;

• Selling a wider range of products than a competitor

• Offering free gifts with purchases, for example petrol stations offers free gifts when you spend a certain amount on petrol;

• Rewarding customers for their loyalty, reward cards are a common way of doing this.

What many customers do not realise is that they will be paying a higher price for these extra services. Businesses hope that customers do not mind paying a higher price in return for a service that is better than its competitors.

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Pricing Strategies

There are a number of pricing strategies that a business could use. Some of these strategies are used because the business is trying to expand its sales, whilst others are to ensure a profit is made.

Cost plus pricing

The cost of a particular job or product is calculated then a particular percentage is added on top. This is sometimes known as a mark-up, e.g. the total cost of repairing a television is £100, if a business adds a 20% mark-up it will charge a total of £120. Some businesses will use cost plus pricing to sell all of the products from a particular factory. It will calculate the total costs and divide it by the number of goods it has made to give the average cost. It will then add a percentage to this to get the final price

Skimming (for a new product)

When a new product is released it may be possible to start off charging a quite high price. This can be because owning the product first has some prestige or novelty attached to it. Many different prices can be charged as the product becomes less and less in demand, for example when the Play Station first came out Sony charged a very high price, over time its price has fallen in the hope of attracting more sales.

Penetration Pricing (for a new product)

When a business brings out a new product, it may feel it needs to make a lot of sales to establish itself in the marketplace. It can start off by offering the product at a low price to encourage people to buy the product. When they reach higher levels of sales they can raise prices. Businesses have done this when they have introduced new chocolate bars and cereals, trial prices are very low and the price gradually rises over time.

Destroyer Pricing

You sell your good at a very low price in order to destroy new or existing competitors. Easy Jet believed that British Airways was using destroyer pricing when they introduced the new budget airline Go. Easy Jet argued that British Airways were setting Go’s pricing so low in the hope of forcing existing budget airlines out of business.

Competitor based

This type of pricing is suitable when the market is competitive and price comparisons are easy. Prices in different petrol stations are often the same as it is very easy to compare prices. If one business were to increase its price it is very likely that it would lose a lot of sales as drivers would know that it were more expensive than everyone else.

Price discrimination

Some businesses charge different prices to different people for the same good or service, for example taxis charge higher prices late at night, rail fares are higher during peak periods and it is more expensive to buy a car in the UK than France.

Loss leader

Some products are sold below cost in the hope of selling other products. Iceland often advertise 2 for 1 deals on the television that they will lose money on. This is done in the hope that when consumers come to their store to buy these offers they will buy other products as well.

Psychological pricing

This focuses on consumers’ perceptions of price, for example charging high prices to give the impression quality, charging £2.99 rather than £3.00 because people regard it as over £2.00 rather than over £3.00 band and stressing reductions in price (e.g. was £20 now only £10).

PROMOTIONAL PRICING

This occurs when a temporary price reduction is made, it is usually highlighted to customers using stickers or advertisements for ‘25% off’ or ‘half price’ for example.

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