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IBBusinessDPBusiness ManagementSLRevision Notes4. Marketing 4.4 The Marketing Mix (7 P's)The Marketing Mix: Price

The Marketing Mix: Price (DP IB Business Management)

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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 helping a firm compete effectively

Diagram: Pricing Strategies

Firms can use different pricing strategies such as penetration pricing, predatory pricing, cost plus pricing, premium pricing, or a loss leader strategy

Different types of pricing strategies

  • Price is the only element of the marketing mix that relates directly to revenue

    • It is therefore key 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

An Explanation of Pricing Strategies


Pricing Strategy


 Explanation


Advantages


Disadvantages

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

Examiner Tips and Tricks

Exam questions frequently ask you to be able to justify the most appropriate pricing strategy. When studying the data provided,  consider the points in the table above and then make a recommendation.

For example, in launching a new product into a competitive market, it may be appropriate to use a penetration pricing strategy to attract customers and encourage them to switch brand in order to gain sales and market share quickly.

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