For cost-based, competitive and demand-based method
The different pricing strategies;
Cost-based pricing
Competitive pricing
Destruction pricing
Price wars
Demand-based pricing
Price skimming
Penetration pricing
Psychological pricing
Promotional pricing
Dynamic pricing
Cost-based Pricing
Cost-based pricing strategies involves adding a mark-up on the average cost. The mark-up amount would be the targeted profit determined by the firm.
Competitive Pricing
Competitive pricing employs either destruction/destructive pricing or price war strategy. They compete by aggressively reducing prices with the aim of taking over competitor's market share. As competition intensifies, price of product may go lower than cost. Both strategy cannot be adopted long-term as it will be detrimental to the firm as well as the industry.
Demand-based Pricing
Demand-based pricing strategies are the most popular pricing method, as they are influenced by the demand of consumers.
Price skimming involves charging a high price on newly launched products. They are usually employed on products that are unique, and therefore have little competition. The high price will enable the firm to recover its R&D cost on developing the product.
The objective of penetration pricing strategy is to "penetrate" the market. They do so by setting a low price to encourage customers to try it. This strategy is usually used by firms who want to enter an existing market and gain market share.
Products that is suitable for psychological pricing are products that are valued by its price. The higher the price, the more exclusive it becomes - indicating luxury, prestige and high quality. These products usually have very high brand value.
Promotional pricing are short term price reduction meant to boost sales for a short time. They are usually seasonal, with the aim of reducing inventories or disposing old stock. Summer or winter sales are where promotional pricing method is used.
The prices of products using dynamic pricing strategies fluctuates and changes all the time depending on real-time demand. This strategy is often employed on products that needs to maximize capacity to profit. Examples are airline tickets, which will cost similarly to operate with a loaded or empty plane. As such, each airline strives to fill-up seats for each flight. Prices of ticket will vary depending on departure date and time, and number of seats still available.
PAST YEAR QUESTIONS
Do you think a firm should change its pricing strategy as the business expands? Justify your answer. (6 marks) May/June 2018/11
Identify and explain two reasons why using the right pricing method is important for Adele’s business. (4 marks) May/June 2018/12
Identify and explain one advantage and one disadvantage to a firm of using cost plus pricing. (6 marks) Oct/Nov 2018/11
Identify and explain two pricing methods a firm could use. (6 marks) May/June 2019/11