1. tutor2u ™ GCSE Business Studies Revision Presentations 2004 Pricing Strategies

2. tutor2u ™ GCSE Business Studies Introduction Pricing = deciding what price to set for products and services What is a price?  What the buyer is prepared to pay in exchange for a product or service Price – often called something else; e.g.  Fee  Fare  Rent  Subscription

3. tutor2u ™ GCSE Business Studies Price and the Marketing Mix Price is a very important part of the marketing mix Price directly influences profits by creating revenue rather than affecting costs Price helps a business “differentiate” its product or service compared with other, similar products  E.g. High price = better quality?  E.g. Low price = better value / lower quality? The price that is set must be consistent with everything else in the marketing mix  E.g. a high-priced product needs to have features/benefits that customers feel justify paying more

4. tutor2u ™ GCSE Business Studies Price and Marketing Objectives Main objective of setting the right price = generate the level of sales that meets the objectives of the business Possible objectives that influence price-setting: Maximising profits Maintaining or increasing share of a market Entering a new market and getting a product/service accepted by customers in the new market Increasing sales volume (e.g. to make more efficient use of production)

5. tutor2u ™ GCSE Business Studies Pricing Strategies Cost-plus pricingSetting a price by adding a fixed amount or percentage to cost of making product Penetration pricing Setting a very low price to gain as many sales as possible Price skimmingSetting a high price before other competitors come into market Predatory pricingSetting a very low price to knock out all other competition Competitor pricing Setting a price based on competitors prices Price discrimination Setting different prices for same good, but to different markets e.g. peak and off peak mobile phone calls Psychological pricing Setting a price just below a large number to make it seem smaller e.g. £9.99 not £10

6. tutor2u ™ GCSE Business Studies Market Skimming High price, Low volumes Skim the profit from the market Suitable for products that have short life cycles or which will face competition at some point in the future (e.g. after a patent runs out) Examples include: Playstation, jewellery, digital technology, new DVDs, etc. Plasma screens: Currently at high prices but for how long? Title: Thin-shaped television. Copyright: Getty Images, available from Education Image Gallery

7. tutor2u ™ GCSE Business Studies Price Discrimination Charging a different price for the same good/service in different markets Requires each market to be impenetrable Requires different price elasticity of demand in each market Prices for rail travel differ for the same journey at different times of the day Title: Inter-City 125. Copyright: Getty Images, available from Education Image Gallery

8. tutor2u ™ GCSE Business Studies Destroyer/Predatory Pricing Deliberate price cutting or offer of ‘free gifts/products’ to force rivals (normally smaller and weaker) out of business or prevent new entrants Anti-competitive and illegal if it can be proved Microsoft – have been accused of predatory pricing strategies in offering ‘free’ software as part of their operating system – Internet Explorer and Windows Media Player - forcing competitors like Netscape and Real Player out of the market. Title: Bill Gates speaks at UNIX convention. Copyright: Getty Images, available from Education Image Gallery

9. tutor2u ™ GCSE Business Studies Pricing to Enter a New Market Difficult to get pricing right when entering a new market  Market likely to have well-established competitors  Customers in the market already have perceptions about what the right prices are  How can a business attract attention to their product/service?  What kind of messages are sent to customers by asking for a low/medium/high price?  How will existing competitors in the market react? Will there be a “price war” If first into market then Price Skimming may be the right strategy If trying to enter and build share of a well-established market – then Penetration Pricing may be best

10. tutor2u ™ GCSE Business Studies Product Life Cycle and Pricing The Product Life Cycle  Describes how sales of a product change over time  Various phases – introduction; growth; maturity; decline  Price needs to change depending on the stage of the product life cycle E.g. launch phase  For a new market with few competitors. Then price can be high E.g. growth phase  More competitors and higher sales volume; price likely to be lower

11. tutor2u ™ GCSE Business Studies Loss Leaders A product offered at a loss to entice customers to visit a shop or website. The hope is that customers will either :  Purchase other products at the same time,  Or become longtime / loyal customers to make up for the loss. Advantages  Loss leaders can be just a few products in a much wider range - but the customer has the impression that the whole range is great value  Good method of short-term pricing Disadvantages  Customers come to expect low prices on these products