PriceOther pricing strategies

Psychological pricing

Psychological pricing is used to make customers perceive the price of a product is lower than it is.

For example, charging £19.99 for a product instead of £20, the customer will perceive the product is less than £20 and that they are receiving a good deal. This could ultimately secure the sale.

Cost-based (cost plus)

Cost-based (cost plus) pricing - This method of pricing is based on calculating the cost of producing the item and then adding on the percentage profit required by the company.

For example, if a cake costs £1 to make and the company wants to make a 50% profit, they will sell the cake for £1.50.

This method of pricing makes sure that all production costs are covered, although it does not consider any external factors such as the competitors pricing or the economic climate.

Penetration pricing

Penetration pricing is used to enter a new market. The price will be set lower than competitors to gain market share.

Once a product becomes established the price will increase to be more like the market price.

This strategy can be used to encourage customers to switch brands, although it does mean the company will not be making much profit during the initial launch of the product.

Promotional pricing

Promotional pricing is a short term pricing strategy. Prices are reduced for a period of time through discounts, special offers or the use of vouchers.

This strategy is often used to attract a lot of media interest or to help clear old or obsolete stock, for example during January sales.

Price discrimination

Price discrimination is a short term pricing strategy used when demand for a product or service may change due to changes in consumer demand.

This means that you may pay different prices for the same product or service at different times of day or at different times of the year, in different locations or when different prices are charged for different customers. For example:

• train tickets have different prices for peak times (like the morning rush hour) and off-peak times (during the day when there is less demand). Prices also vary depending on age.
• a hotel in Spain can charge more for a room in August when more people are looking for a summer holiday in warm weather than it can in February when fewer people take a holiday and the weather is less reliable.
• prices charged at service stations and airports are often much higher than the price charged for the same product in high street shops

Destroyer/predatory pricing

Destroyer pricing is used to eliminate competition. It involves a business setting a very low price in order to attract customers away from competitors, who will struggle to match the low price and may go bust.

Usually only large businesses can use this strategy as they can withstand the losses for a longer period than small businesses can.

Market skimming pricing

In market skimming pricing a new product is launched at a high price. At this early stage those people who must have it will buy the product despite its price.

In this way a business is said to skim the cream from the top of the market, allowing the business to make a high profit.

Once the sales start to slow, the business will begin to lower the price so that more customers can afford their product.

This short term pricing strategy can only work when there are little or no competitors in the market.

Loss leader

Using loss leaders is a method of selling certain products at a loss or below market value to encourage customers to come into a business. The hope is that they will buy other full price items.

This method of pricing should increase sales of other full price products in the store.

Loss leaders can be used to increase customer numbers and may create customer loyalty.