1-3-3-pricing-strategy

The business calculates the cost of production and then adds a markup to determine the final price

The markup covers the cost of production plus the business’s desired profit margin

The formula to calculate the cost-plus price is:

This pricing strategy is simple to calculate

It is commonly used by manufacturers that produce standardised goods (e.g. washing machines)

The business sets a high price for a new product/service when it is first introduced to the market

This is effective when an established brand is introducing a new product and there is a high demand for it (e.g. successive models of Apple’s MacBook Air)

The high price helps the business recover its development and marketing costs quickly

The business will then gradually lower the price to ensure sales continue

The business sets a low price for a new product/service when it is first introduced

This is effective when a business wants to quickly capture market share and attract price-sensitive customers (e.g. many new perfumes launch using penetration pricing)

Once it has enough customers, the business will start to raise the price

The business sets prices so low that it drives its competitors out of the market

This strategy is illegal in many countries, including the UK, as it is considered anti-competitive and harms customers by reducing choice in the market

The business sets its prices based on its competitors’ prices

This is effective when a business is in a highly competitive market and wants to maintain its market share

The business must continually monitor its competitors’ prices and adjust its prices accordingly to remain competitive

This pricing strategy takes into account the customer’s emotions, beliefs and attitudes towards the product/service

For example, a business may set its prices at £9.99 instead of £10, as customers perceive the former as better value

Products with many USPs and high differentiation can command higher prices

For example, Dyson vacuum cleaners have unique features that allow the company to charge a premium price

A business needs to consider the price elasticity of demand when setting its prices

For example, if a business is in a highly competitive market with many substitutes, lowering prices will increase revenue

Businesses should set lower prices if the product is price elastic

Businesses should set higher prices if the product is price inelastic

In highly competitive markets, businesses may need to set their prices low to remain competitive

For example, the budget airline industry is highly competitive, and airlines keep their prices low to increase demand

In less competitive markets, businesses may be able to set higher prices

A strong brand with a loyal customer base can command higher prices

For example, Nike’s strong brand allows it to charge premium prices for its athletic shoes and apparel

In the introduction stage, prices may be set lower to attract customers and build market share

In the growth stage, prices can increase as demand for the product increases

In the maturity stage, prices may need to be lowered again

Prices must cover the cost of production and provide a reasonable profit margin

For example, a restaurant needs to consider the cost of ingredients, labour, rent and other expenses when setting menu prices