4.5.2 Price talks about pricing methods.
- price is the value of good a service paid by the customer
Cost plus mark-up pricing
- there’s a profit margin on products sold
- can be expressed as a percentage or absolute term (i.e. you want $7.5 contribution per unit sold above the average cost of output)
advantages
- simple to understand and calculate
- ensures sales earn a positive contribution
- can be used everywhere
- useful in markets where raw material costs are rising
- good if customers are willing to pay high price for specialist products
disadvantages
- ignores prices of competitors (which can be at a lower price!)
- few incentives to reduce costs
- does not help the customer, nor consider the needs of customers
- concentrations on price rather than demand
Penetration pricing
- sell at low price in order to enter a market
- quick brand recognition
advantages
- brand image quickly
- discourage competition from entering because of low price and low profit
- higher sales and gaining market share since product is cheap
- can encourage word of mouth promotion
- low prices force businesses to improve their cost control and productivity
disadvantages
- not sustainable long term (losses due to low margins)
- if costs go up suddenly, you’re screwed
- people may associate your product/brand as cheap
Loss leader pricing
- sell a product at below its cost of production
- not sustainable long term so sold limited time
- game sellers adopt the loss leader model
- i.e. PS3 was sold at a loss of $240 per console. The hope is that subsequent sales will make up for the loss (i.e. cost to purchase game)
advantages
- attract customers - products bought at a bargain!
- higher sales revenue from products bought in addition to loss leader
- quickly clear out older stock or merchandise
- can be used to penetrate a market
- attract away from rival (because of the low cost)
disadvantages
- expectation to always have loss leader products
- loses business money
- need to have sufficient inventory to avoid customer dissatisfaction. But stockpiling is expensive and harm the firm’s liquidity position
- anti competitive and considered unethical. regarded as a controversial pricing method (in the same way as predatory pricing.)