Price
Price is the amount a business charges its customers for its product or service. Prices are set according to how much a customer is willing and able to pay. Customers want value for money and this may mean a business needs to set low prices to generate high levels of sales.
Price and demand
For most products, an increase in price will lead to a decrease in demand. However, a strong unique selling point (USP) or brand image can mean that demand isn’t strongly affected by changes to the price.
Pricing methods
Companies can use different pricing methods depending on the product or service they are selling.
There are five main strategies that businesses can use.
- price skimming – start with a high price and then reduced over time
- price penetration – start with a low price and increase it over time
- competitive pricing – set a similar price to your competitors
- loss leader – selling one product at a loss so a customer has to buy additional products that will generate a profit
- cost-plus – working out the cost of making a product and then adding on a percentage
Factors that influence price include:
- costs – depending on the cost of making the product, the price will need to be set to ensure they make a profit
- demand – if demand is low, a business may have to lower their prices to encourage people to buy the product
- degree of competition – a business may need to reduce its prices to compete with other businesses
- product life cycle – a business may charge a different price depending on the stage of the product life cycle
- brand image – some products can have a higher price because customers perceive the business’s brand as desirable
