Theory on Pricing
Strategy
For Lesson 11
 Products and services need to be priced correctly or
the business may not succeed. There are a number of
ways to determine a satisfactory price
Pricing
Policy
 We are going to look at a number of different pricing
strategies
 For your task you need to be able to explain what the
pricing strategy is and then you need to decide the
pricing strategy that best suits you.
 The business calculates how much it costs to make the
product then adds on a % for profit
Cost Plus
 E.g. Chocolate bar
 The business adds up the cost of the item with the
overheads, then marks up the product/service for the
profit. The problem is that this strategy does not consider
the customer and it is difficult to calculate the cost of
providing a service
Market
Driven
 Look at the price that your competitors are
charging
 Eg. Soft Drinks:
Penetration
Pricing or
Break into
the market
 The business charges low prices in order to obtain a
market share. Once it has achieved an acceptable
share of the market, the business will increase the price.
 E.g. New magazines
 Take advantage of initial high demand for a new
product by setting an initial high price
Premium
Pricing or
Skimming
 This method is used by businesses that have a
competitive advantage which is not sustainable. The
high price attracts new competitors into the market,
which results in the prices being lowered due to
increase supply
Customer
Driven
 Set your price according to what customers are willing
to pay
 E.g. through market research
Economy
Pricing
 A business sells its products/services at a low price. All
business activities are kept at a minimum, including
marketing and manufacturing. Examples include
supermarket own brands.
Psychological
Pricing
 This strategy is used by businesses that want the
consumer to believe they are getting a product/service
much cheaper than it actually is. An example of this
method would be a product priced at 99p rather an £1
Promotional
Pricing
 This method is used when a product/service has been
on the market for some time and demand is beginning
to fall. Prices are reduced temporarily in the hope of
stimulating renewed interest in it. There are many
examples of promotional pricing including approaches
such as BOGOF (Buy one get one Free)
Video to
watch
 http://www.youtube.com/watch?v=XBmWEduod5k