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4.2 MARKETING – PRICE

4.2 MARKETING – PRICE . IB BUSINESS & MANAGEMENT A COURSE COMPANION P210-212. PRICING STRATEGIES . The pricing strategies adopted by businesses can be divided into three main categories: Cost-based pricing Competition-based pricing Market-Based pricing . Cost Based Strategies.

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4.2 MARKETING – PRICE

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  1. 4.2 MARKETING – PRICE IB BUSINESS & MANAGEMENT A COURSE COMPANION P210-212

  2. PRICING STRATEGIES • The pricing strategies adopted by businesses can be divided into three main categories: • Cost-based pricing • Competition-based pricing • Market-Based pricing

  3. Cost Based Strategies Cost-plus Pricing • This method is very commonly used by businesses as it easy to calculate and understand. • It simply involves working out the average cost per unit produced (total cost divided by output) and then adding a percentage mark up. • Eg: If a company makes 100 products at total cost of $1000, its average cost per unit is $100. It may decide that it wants a profit margin of 25%, meaning the selling price would be $125. • The higher the percentage mark up, the more profit per unit. • This strategy is also known as full cost pricing or absorption pricing.

  4. Competition-based Pricing Price Leadership • Price leadership exists where a dominant organization in a market sets a price for its products and its rivals feel compelled to match that price. • This may be because there is one large business in the industry coupled with lots of smaller competitors with far less market power to set prices • It can also be seen in oligopolistic markets (markets with a few large businesses) where the leaders all tend to match each other’s prices.

  5. Competition-based Pricing Price Leadership (continued) Example • Petrol/gas stations will often have policies where they agree to match local rivals prices. • This practice has brought about claims of illegal agreements by businesses to fix prices at an artificially high level and exploit customers • However, it is very hard to prove that this collusion has actually occurred.

  6. Market-based Pricing Price Penetration • Price penetration is where a business sells it products at a low price to try to break into a market and gain market share quickly. • The aim of this policy is to gain enough market share to be able to raise prices in the future once the business has become established.

  7. Market-based Pricing Price Skimming • This is most commonly seen with new and innovative products, such as new mobile phones and games consoles. • The price is set high initially to gain those customers who will pay almost any price to get their hands on the latest gadget. • Once the business has profited from selling to those customers, it drops the price to tempt other customers who may have been put off by the high price originally. • It is only able to do this because there is likely to be almost no competition in the market due the cutting edge nature of the product.

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