The Marketing Mix: Common Pricing Strategies (HL IB Business Management)

Cost plus

• The business calculates the cost of production and then adds a markup to determine the final price
• The markup covers the cost of production plus the business's desired profit margin
  
• This pricing strategy is commonly used by manufacturers that produce standardised goods e.g. washing machines

• A simple and quick methods of calculating a price for a product
• It ensures that a profit is made on each item sold

• It does not consider the needs of the market 
  
• The pricing approach of competitors is ignored

Penetration

• The business sets a low price for a new product/service when it is first introduced
  
• This is effective when a business wants to quickly capture market share and attract price-sensitive customers e.g. many new perfumes launch using penetration pricing
  
• Once they have enough customers, the business will start to raise the price

• Customers are attracted to buy the product at a low price leading to high sales volume and market share
  
• Competitors unable to match or beat the low price may be forced out the market leading to less competition

• Customers may perceive that the product is of low quality if the product is sold at a low price
  
• Selling at a low price will limit the amount of profit made

Loss Leader

• Charging a price below the average cost for a product
• The aim of this method is to attract customers to buy other profitable, products at the same time, making up for losses on the low-priced product
• It is frequently used by large supermarkets that operate in competitive markets

• This is an effective way to attract customers to switch brands
  
• Losses may be minimised for businesses that have high levels of stock turnover for loss leader products

• Smaller rivals may accuse businesses using this method of behaving unfairly
  
• If customers do not purchase other goods the business will make a loss

Predatory

• The business sets prices so low that it drives its competitors out of the market
  
• This strategy is illegal in many countries as it is considered anti-competitive and harms customers by reducing choice in the market

• This method allows a business to gain a dominant position in the market
  
• It acts as a barrier to entry for firms considering selling in the market

• Use of this strategy may have a negative impact on a businesses reputation
  
• It is an expensive strategy for which a business needs sufficient finance to fund

Premium

• The business sets a high price for its product which gives customers an impression of high quality and luxury
  
• This is effective for designer brands such as Chanel and Ritz Carlton Hotels
  
• The high price helps the business differentiate its products from competitors and make high levels of profit
  
• Premium pricing should not be confused with price skimming, where a high price is set for a short period at a product's launch

• This method emphasises  exclusivity and improves the value of a brand
• Premium-priced goods often attract favourable attention from celebrities and the media, reducing the need for promotional activity

• Large numbers of more price-conscious customers are ignored which limits sales revenue
• Premium-priced products require high quality raw materials and components so variable production costs are usually high