Price: Methods of Pricing (OCR GCSE Business)

Price Skimming

• Price skimming involves setting a high price for a new product when it is first introduced to the market

  • The price is gradually lowered to ensure sales continue

• Price skimming is effective when an established brand introduces a new product and there is a high demand for it

  • E.g New models of Apple's Macbook Air are sold at a high price initially

  • The high price helps the business recover its development and marketing costs quickly and start generating a profit

  • It also establishes a premium image for a product

• It is less useful for new or lesser-known brands as the high price requires customers to trust that a product will meet their needs

• Loyal customers may become tired of paying high prices for new product versions and look to see what competitors offer

Cost-plus Pricing

• Cost-plus pricing is where the costs of production are calculated and a percentage markup is added to determine the final price

  • The markup covers the cost of production plus the business's desired profit margin

• Cost-plus pricing is commonly used by manufacturers that produce standardised goods e.g. fencing panels

• Cost-plus pricing is a simple and quick method of calculating the selling price for a product

• It ensures that a profit is made on each item sold

• However, it does not consider the needs of the market and ignores the pricing approach of competitors

Penetration Pricing

• Penetration pricing involves setting a low price for a new product when it is first introduced

  • Once the product is established, the price is increased

• Penetration pricing helps to quickly capture market share and attract price-sensitive customers

  • E.g. Publishers often uses penetration pricing when they launch new magazines

• Customers are attracted to buy the product at a low price, leading to high sales volume and market share

• Rivals are unable to match or beat the low price, and may be forced out of the market, leading to less competition

• However, customers may perceive that the product is of low quality if it is sold at a low price

• Selling at a low price is also likely to limit the amount of profit made in the short-term

Competition Pricing

• Competition pricing is where the selling price is similar to that of rival products

• This is effective when a business is in a highly competitive market and wants to maintain its market share

• However, a business must continually monitor its competitors' prices and adjust its prices accordingly to remain competitive

  • E.g. Major UK supermarkets use competition pricing across most of their key product ranges, meaning the cost of a weekly shop is similar for most families, regardless of where they buy their groceries

Promotional Pricing

• Promotional pricing takes into account the customer's emotions, and compulsive behaviours in responding to price promotions

  • E.g. a business may have a BOGOF offer (buy one, get one free) that encourages customers to make an impulse purchase that appeals to their sense of value

• Promotional pricing generates high volumes of sales for a limited period of time

• It is a useful tool to catch the attention of customers, especially if accompanied by point of sale promotional materials

• However, profit margins are likely to be lower during price promotions and customers may be unwilling to pay a higher price once a price promotion comes to an end