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In
setting a price for a product the company will almost certainly want to cover
its costs and make a profit as well.
Firms
have to decide whether to charge:
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A
low price in order to attract sales.
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An
average price, this means you have to compete with rivals by other
means.
e.g.
quality, promotions.
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A
higher price can be charged if the product is seen as being better than
the rivals.
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There
are a number of Pricing Techniques:
FOR NEW PRODUCTS
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Skimming
When
a new product is released it may be possible to start off charging a
quite high price. This can
be because owning the product first has some prestige or novelty
attached to it. Many
different prices can be charged as the product becomes less and less in
demand.
e.g.
N64, fashionable clothes.
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Penetration
Pricing
When
a firm brings out a new product, it may feel it needs to make a lot of
sales to establish itself in the marketplace.
It can start off by offering the product at a low price.
When they reach higher levels of sales they can raise prices.
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FOR EXISTING PRODUCTS
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Price
leader
The
market leader will change its price and its competitors will follow
suit.
e.g.
when the price of petrol or interest rates change competitors normally
follow suit
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Price
taker
You are a small seller in a large market selling
an identical product, thereby you have no power to change the price, if
you raise your price you will lose all of your customers as they will go
to a competitor.
e.g.
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TACTICS
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Cost
plus pricing
The
cost of a particular job is calculated then a particular percentage is
added on top. This is sometimes known as a mark-up.
e.g.
the total cost of repairing a television is £100, if a business adds a
20% mark-up it will charge a total of £120.
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Hour
based pricing
Some
businesses are able to calculate a standard charge per hour.
e.g.
gardening, photography.
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Destroyer
Pricing
You
sell your good at a very low price in order to destroy new or existing
competitors.
e.g.
the Times newspaper reduced its price in the 1990’s, other newspapers
followed suit and the result was the Today newspaper went out of
business in 1995.
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Competitor
based
This
type of pricing is suitable when the market is competitive and price
comparisons are easy.
e.g.
goods in supermarkets.
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Price
discrimination
A
firm will charge different prices to different people for the same good
or service.
e.g.
some taxis charge different prices late at night, rail fares are higher
during peak periods.
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Loss
leader
Some
products are sold below cost in the hope of selling other products.
e.g.
retailers put a well known brand name in shop window at a loss in order
to attract people into the shop.
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Psychological
pricing
This
focuses on consumers’ perceptions of price.
e.g.
charging high prices to convey quality, charging £2.99 rather than £3.00,
because people regard it as over £2.00 rather than in the £3.00 band
and stressing reductions in price (e.g. was £20 now only £10).
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Contribution
pricing
When a firm sells a range of products, the price
of each good will have to cover all of the direct costs, in addition to
this it will also have to make a contribution to the indirect costs and
profit.
e.g.
Sony makes a large number of electrical goods, each of which helps to
cover the costs of rent, lighting, heating etc.
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