Price

• Price is the amount charged

for a product or service.
• Pricing is a very crucial
decision area as it has effect
on demand for the product
and also on the profitability
of the firm.
Factors that affect the price charged by a business

Demand for a product

Cost involved

Government restrictions
Pricing

Consumer’s ability to
pay

Prices charged by
competitors for similar
products
 Penetr-
ation
pricing
Cost-
plus
pricing Compet
-itive
pricing

Promot-
ional Price
pricing skmming
Adding a percentage to the cost of producing a product to get the price is
called cost-plus pricing.
Cost-Plus / cost-based Pricing
 Penetration pricing
When a business introduces a new product and charge a low price for a
limited period, it is called penetration pricing.

The aim of this strategy is to get the product established in the market.

Once this objective has been achieved the price slowly increases to
higher levels.
 Two main reasons of using penetration pricing

1. It is hoped that consumers get into the habit of buying the product
when the price is low. Then, when the price starts to rise, people
continue to buy the product.

2. It is hoped to sell larger quantities of the new product to bulk buyers

and get established in the market.
 Skimming/ creaming pricing
When a business launches a product into a market charging a high price
for a limited time period. This is caked skimming or creaming.

The aim of this strategy is to generate high levels of revenue with a new
product before competitors arrive.

Eg- Apple products, some pharmaceutical companies

 Two main reasons of using skimming pricing

1. It is hoped that consumers are prepared to pay higher prices because

they llike to be the first to buy the product.

2. It is hoped to recover high research and development costs of the

product by charging high price initially.
 Competition-based pricing
When a business takes a close look at what their rivals are charging
when setting their prices, this is called competition-based pricing.

One approach is to charge the same price as competitors. It is called a

safe pricing strategy.

Another approach is for the market leader to set the price ad all others
follow. This is called price leadership.
Two main reasons of using competition-based pricing

1. In competitive markets where prices are all very similar, businesses

are more likely to engage in non-price competition.

2. A business might lower its price for a temporary period to drive out
competition. This is called destroyer or predatory pricing. The aim is to
lower prices for a period of time to make it difficult for rivals to compete.
 Promotional pricing
Lowering the price of a product for a short period of time to draw in
customers.

Different approaches to promotional pricing are: discounts and sales,

psychological pricing and loss leaders.
 Reasons of using promotional pricing

• To get rid of old stock (before the start of a new selling season
perhaps)
• To generate some cash quickly to help solve a cash flow problem
• To generate renewed interest in an existing product
 Discounts and sales

Businesses often cut prices for a short period.

They have sales where goods are sold below the standard price.
 Psychological pricing

One common pricing strategy that sets the price slightly below a round
figure- charging $99.99 instead of $100.
 Loss leaders

Some products are sold at a price lower than cost. These aree called a
loss leader and are popular with supermarkets.
The customers will enter the store to buy the loss leader. Once in the
store, it is hoped that customers buy other products. Overall, this will
generate a profit.
 Patents

Legal documents giving a person or company the right to make or sell a

new invention, product or method of doing something and stating that no
other person or company is allowed to do this.