A level revision

Pricing strategies and tactics

Businesses use a range of pricing methods when pricing a new product. Pricing strategies are used to achieve long term objectives for the business. Pricing tactics are used in the short term to achieve a specific objective.

Pricing strategies

There are 4 key pricing strategies commonly used by businesses

Price skimming

A product which is the first to enter a new market or new technologies will often use price skimming. This method involves pricing the product at a high price at launch, doing so allows companies to cover their research costs quickly. DVD players, XBOX and Plasma TVs are all examples of products which have used this strategy.

Penetration pricing

Penetration pricing is used typically used for products new to a well established market. Such a method involves pricing the product very low in order to gain market share and attract customers. New magazines will use this pricing strategy.

Premium pricing

A product which has a no or few competitors because the product has significant advantages may be priced artificially high in order to maximise profits. For example a flight on Concorde would have cost a lot more than a normal aircraft.

Price takers/Market price

This is where a product is priced at the same price as other products in the market. This strategy is used most commonly in food markets where all the products are the same

Pricing tactics

There are two key pricing tactics you need to be aware of:

Loss leaders

This is where a business will sell one of its products at a very low price, sometimes even at a loss. This is done in order to increase sells in other products which are being sold at a profit. This tactics is often used by supermarkets in order to attract customers into the store.

Psychological pricing

This involves pricing a product at a price which may seem lower than it really is. For example, car dealers usually sell cars at £15,999 or retail stores will sell products for £13.99.