Page 176 - Cambridge IGCSE Business Studies

Cambridge IGCSE Business Studies Section 3 Marketing

Features Uses Benefits Limitations
Market skimming
■ A high price is set to ■ New products that are ■ The high price enables the ■ The high profits will
maximise short run profits. unique or very diff erent firm to recover research eventually attract cheaper
■ When competitors enter from other products on the and development costs competitor products.
the market with a similar market. which are oft en very ■ Some customers who
product then this will cause high for products such as would like to buy the
a price to fall. pharmaceutical products product are not able to
and hi-tech goods. do so because of the high
■ The high price may help price. This means a loss of
the firm to create a quality sales.
image for its products.

Penetration pricing
■ The price is set lower than ■ Used for new products ■ Attracts customers ■ Possible loss of revenue
similar products already on that are competing with more quickly and helps due to lower prices.
the market to encourage similar products already the product to become ■ Cannot recover any
high volume of sales and established in the market. established in the market. development costs quickly
build customer loyalty. ■ Can increase market share and if the life cycle is too
■ Once customer loyalty quickly. short then development
has been gained for the costs might never be
product, the price will be recovered.
increased to a level similar
to that of competitors.
Competitive pricing
■ The price is set at a level ■ New products where the ■ Prices are similar to ■ If the market has a price
174 similar to that charged by business already has a competitors so business leader then this price
competitors. good brand image and can compete on things would need to be followed
loyal customers. they might be better at otherwise customers and
■ Existing products that have such as quality product, or market share will be lost.
previously been priced customer service. ■ Still need to find ways
using market skimming or of competing in order to
penetration (see above). attract sales.

Cost-plus pricing
■ Price is set by adding the ■ Retailers often use this ■ Quick and easy to work out ■ Price might be set higher

required profit percentage method when deciding price. than competitors or more
onto the cost of making the on the final price of the ■ Makes sure that the price than customers are willing
product. product to the consumer. covers all of the costs. to pay. This reduces sales
and profits.

Promotional pricing
■ The normal price is ■ Loss-leader pricing is ■ Good way to sell off ■ Revenue on each item is
discounted, sometimes used by retailers to attract unwanted inventory before lower so profits may also
below cost – known as customers into the store. it becomes out-of-date. be lower.
loss-leader pricing. Or They not only buy the loss- ■ A good way of increasing
consumers are off ered leader but also other goods short-term sales and
more of the product for less at their normal price. market share.
than the full price – buy- ■ Other promotional pricing
one-get-one-free, or 25% is used to create brand
extra ‘free’. awareness and customer
loyalty, or to sell off surplus
stock.

Table 12.3 Features, uses, benefits and limitations of the main methods of pricing