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

Types of Pricing Strategies

• Choosing the right pricing strategy is essential for a business to be profitable, competitive, and successful in the long run

  • By understanding their customers, competitors, and costs, businesses can set prices that maximise revenue and profitability

  • Pricing can play a significant role in positioning the brand in the market and help a firm to compete effectively

Diagram: the names of common pricing strategies

• Price is the only element of the marketing mix that relates directly to sales revenue and is vital to a business achieving its sales and marketing objectives

• Businesses need to select the most appropriate methods of pricing to ensure that they are able to make a profit whilst meeting the needs and expectations of customers

  • A business may use more than one method of pricing across its product range

    • E.g. a large supermarket may offer premium-priced product ranges alongside a selection of loss leaders

Explanation of Pricing Strategies

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

Advantages and disadvantages of cost plus pricing

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

Advantages and disadvantages of penetration pricing

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

Advantages and disadvantages of loss leader pricing

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

Advantages and disadvantages of predatory pricing

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

Advantages and disadvantages of premium pricing