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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:


A low price in order to attract sales.


An average price, this means you have to compete with rivals by other means.

e.g. quality, promotions.


A higher price can be charged if the product is seen as being better than the rivals.


There are a number of Pricing Techniques:




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.


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.




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


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.








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.


Hour based pricing

Some businesses are able to calculate a standard charge per hour.

e.g. gardening, photography.


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.


Competitor based

This type of pricing is suitable when the market is competitive and price comparisons are easy.

e.g. goods in supermarkets.


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.


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.


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).


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.




E-mail Steve Margetts