Pricing strategies - Cost-based (Cost-plus), Competition-based (price leadership), Market-based (Penetration and Skimming)


Analyze the appropriateness of each pricing strategy.

external image pricingstratmap.gif
http://www.bized.co.uk/educators/16-19/business/marketing/presentation/pricingstrat_map.htm

COST-BASED STRATEGIES:
Cost-plus pricing/ Mark-up pricing
- add a percentage/predetermined amount of profit (aka profit margin/mark-up) to average cost of production (Fixed + Variable Costs)
- floor pricing: low price = low profit margins by selling large volumes (economy brands)
- advantages: easy to calculate; disadvantages: requires intuitive decision-making
Example:
Average Cost = $6
Profit Margin = 50%
Selling Price = $9

COMPETITION-BASED STRATEGIES:
Price leadership
- used for best-selling products/brands; no substitute product so business can decide price
- competitors establish their price based on selling price of the market/price leader

MARKET-LED STRATEGIES:
Penetration
- low price to gain market share, brand awareness
- slowly increase in price as product is more established
- used for mass market products, new products entering a well-established market
- drawbacks: low price may cause product to appear of a low quality

Skimming
- high price used to regain high costs of R&D, maximize profits
- slowly decrease in price as competitors are introduced
- used for innovative products, technologic products
- prestige pricing: permanently high price
- advantages: image of prestige; disadvantages: must be accompanied by effective marketing strategies

The appropriateness of a pricing strategy is dependent on branding/marketing objectives, promotional strategies, points of sale available, features of the product, costs of production, level of competition, and profit goals of the business.