Price

3 main pricing methods

1. Cost-based pricing is a pricing method derived from the cost of producing or purchasing a product and then adding a mark-up.

• • Mark-up is a predetermined amount (usually expressed as a percentage) that a business adds to the cost of a product to determine its basic price.

  • For example, if a manager of a clothing store buys 100 jeans at $50 each and applies an 80% on cost, the price to the consumer will be $90 per item.

2. Market-based pricing is a method of setting prices according to the interaction between the levels of supply and demand — whatever the market is prepared to pay.

3. Competition-based pricing is where the price covers costs (cost of raw materials and the cost of operating the business) and is comparable to the competitor’s price.

• • A price leader is a major business in an industry whose pricing decisions heavily influence the pricing decisions of its competitors.

1. Price skimming occurs when a business charges the highest possible price for the product during the introduction stage of its life cycle. Example - Xbox or PS4 when 1st released (remember skimming profits off the top)

2. Price penetration occurs when a business charges the lowest price possible for a product or service so as to achieve a large market share. May be hard to raise prices until product is redeveloped. CostCo/Amazon (remember penetrating below the market price)

3. A loss leader is a product sold at or below cost price Example - Xbox console sold for almost no margin but tried to make it up on games

4. Price points (or price lining) is selling products only at certain predetermined prices - For example, a jeweller may offer a line of watches priced at $55, $75 and $95 regardless of how much they cost at wholesale.

Other strategies

• Psychological pricing- used to take advantage of this consumer response. E.g. $99 rather than $100

• Bundle pricing is where customers gain a ‘package’ of goods and services in addition to the tangible good they purchased.

• Price discrimination - is a pricing strategy that charges customers different prices for the same product or service.

• Prestige or premium pricing is a pricing strategy where a high price is charged to give the product an aura of quality and status. Louis Vuitton or a wine company

Normally, products of superior quality are sold at higher prices. This is usually due to the higher manufacturing cost involved in producing them.

Prestige or premium pricing is a pricing strategy where a high price is charged to give the product an aura of quality and status. For example - Luis Vuitton or a wine company

2011

Q24 Sam and Jody want to start a hairdressing business in their local area. They are very concerned about the number of other hairdressers already in the area and they want to quickly establish market share.

(c) Discuss ONE pricing strategy that Sam and Jody could use to attract customers when they open their business. 4 marks

2012

Q17 A fast food outlet advertises a large soft drink for only 20 cents, knowing that customers will also buy additional items from the menu once they are in the store.

What pricing strategy is this?

(A) Loss leader

(B) Penetration

(C) Price points

(D) Skimming

2013

Q9 What is the most likely reason that a business would use price skimming?

(A) To encourage export sales

(B) To achieve market share quickly

(C) To gain high profits when demand is strong

(D) To reverse the decline stage of the product life cycle

2014

Q9 What is the main reason for a business using penetration pricing?

(A) To maximise profit per unit

(B) To gain short-term market share

(C) To develop a reputation for quality

(D) To take advantage of a lack of competition

2015

Q7 When pricing a potential job, a plumber considers how long the job will take and how difficult it will be.

Which pricing method is being used?

(A) Cost-based

(B) Market-based

(C) Customer-based

(D) Competition-based

2017

Q10 Salty Sunscreens sells the following sunscreens, both containing the same ingredients.

2020

A popular Australian guitar manufacturer is about to enter the US market using a standardised marketing strategy

(b) Recommend a pricing method this business could adopt for the US market. 3 marks