Pricing Strategies Explained
Summary
TLDRThis video explores various pricing strategies businesses use to influence product success. It covers penetration pricing, where initial low prices aim to gain market share, exemplified by Pure Gym's introductory offers. Economy pricing is highlighted through Tesco's value brand, offering low-cost items to drive sales volume. Price skimming is used for innovative products like Sony's PlayStation 4, setting high initial prices to capitalize on demand. Psychological pricing tricks customers into perceiving savings, as seen with £114.99 pricing. Premium pricing, used by Canada Goose, associates high prices with high quality. Competitive pricing matches the market rate to retain market share, while cost-plus pricing simply adds a profit margin to the cost of goods. The video concludes with a quiz to test viewers' understanding of these strategies.
Takeaways
- 💡 **Penetration Pricing**: Businesses set a low initial price to gain market share quickly, expecting to increase the price later.
- 🏋️ **Example of Penetration Pricing**: Pure Gym offers a discounted rate for the first three months to attract new members.
- 💰 **Economy Pricing**: Products are sold at a low cost to attract customers, often used in food retailing with own-brand products.
- 🐟 **Example of Economy Pricing**: Tesco's 'Everyday Value' fish fingers are priced significantly lower than branded alternatives.
- 🍦 **Price Skimming**: Charging a high initial price for a new product with a competitive advantage, then reducing it as competition increases.
- 🎮 **Example of Price Skimming**: Sony's PlayStation 4 was launched at a high price, with the cost decreasing as demand settled.
- 🔢 **Psychological Pricing**: Pricing products to create a perception of value, such as pricing at £114.99 instead of £115.
- 🦆 **Premium Pricing**: Setting high prices to reflect quality and luxury, as seen with brands like Canada Goose.
- 🏆 **Competitive Pricing**: Matching or beating competitor prices to maintain market share, often used in highly competitive markets.
- 🛒 **Cost Plus Pricing**: Adding a desired profit margin to the cost of a product to determine the selling price, a traditional strategy.
- 📊 **Testing Knowledge**: The script concludes with a quiz to test understanding of the pricing strategies discussed.
Q & A
What is penetration pricing?
-Penetration pricing is a strategy where a business prices a product or service low for the initial purchase, typically through special offers, to gain market share through high volume of sales. The goal is to break down market barriers and generate volume, even if it doesn't always generate profit initially.
How does PureGym use penetration pricing?
-PureGym uses penetration pricing by offering the first three months at half price with no joining fee for new members. After the initial period, the price increases to the full price for ongoing membership, providing a regular profitable income.
What is economy pricing and how is it used?
-Economy pricing is a strategy where products are sold at a low cost, often under the retailer's own brand, with minimal markup. It's commonly used in food retailing, such as Tesco's 'Everyday Value' brand, to sell food at a lower price than branded alternatives, encouraging high sales volume.
Can you give an example of economy pricing from the script?
-An example of economy pricing mentioned in the script is Tesco's 'Everyday Value' fish fingers, which are priced at £5 per kilogram, significantly cheaper than the branded alternative, Birds Eye, at £7.15 per kilogram.
What is price skimming and when is it typically used?
-Price skimming is a strategy where a company charges a higher price for a product due to a substantial competitive advantage, often when a new and innovative product is launched with high demand and less competition. It allows the company to get high initial returns.
How did Sony use price skimming for the PlayStation 4?
-Sony used price skimming for the PlayStation 4 by initially pricing it at $349, taking advantage of high demand and less competition at launch. As demand declined, the price also decreased.
What is psychological pricing and how does it influence customers?
-Psychological pricing is a strategy that uses price points to influence customer buying behavior, making products seem substantially cheaper. It often involves setting prices just below a round number, like £114.99 instead of £115, to create a perception of savings.
What is premium pricing and how does it benefit a business?
-Premium pricing is used by businesses with a strong competitive advantage to set high prices, which psychologically supports the impression of high quality. This strategy provides a high profit margin and can actually increase demand for luxury items, as seen with Canada Goose jackets.
How does competitive pricing differ from other strategies?
-Competitive pricing involves setting prices based on what competitors charge, known as the going rate. It's crucial for businesses to be aware of competitor pricing to maintain market share, especially in highly competitive markets. Businesses must differentiate themselves in other ways, such as customer service or availability.
What is cost-plus pricing and how does it work?
-Cost-plus pricing is a traditional strategy where a business adds a desired profit margin to the cost of purchasing or manufacturing a product. For example, if a retailer buys a Samsung TV for £200 and wants a £50 profit, they would sell it for £250. While simple and predictable, it doesn't consider market needs or competitor pricing.
Why is it important for businesses to be aware of competitor pricing?
-Being aware of competitor pricing is important because it helps businesses set their own prices competitively to maintain or gain market share. Ignorance of competitor pricing can lead to overpricing and loss of customers.
How can businesses differentiate themselves when using competitive pricing?
-Businesses can differentiate themselves by offering outstanding customer service, increased availability, or unique product features when using competitive pricing. This helps attract customers despite similar pricing to competitors.
Outlines
💹 Pricing Strategies for Business Success
This paragraph discusses various pricing strategies businesses can adopt to influence the success of their products. Penetration pricing is highlighted as a method where initial low prices are used to gain market share, exemplified by Pure Gym's introductory offers. Economy pricing is showcased through Tesco's value brand, emphasizing low-cost products to drive sales volume. Price skimming is explained as setting high initial prices due to a competitive advantage, illustrated by Sony's PlayStation 4 launch. Psychological pricing is described as manipulating customer perception by setting prices like £114.99 instead of £115. Premium pricing is exemplified by Canada Goose, where high prices reflect perceived quality and luxury. Competitive pricing is about aligning with market rates to maintain market share, and cost-plus pricing involves adding a desired profit margin to the cost of goods.
📊 Testing Knowledge on Pricing Strategies
The second paragraph serves as a quiz to test the viewer's understanding of the pricing strategies discussed. It lists seven statements that correspond to the strategies: penetration pricing with increasing prices over time, competitive pricing based on market rates, psychological pricing that appears cheaper by reducing the price slightly, cost-plus pricing by adding profit margins to cost, premium pricing that uses high prices to increase demand, price skimming with high initial prices that decrease, and economy pricing with low selling prices for high sales volume. The paragraph concludes by encouraging viewers to participate in the quiz and to comment with any questions.
Mindmap
Keywords
💡Pricing Strategies
💡Penetration Pricing
💡Economy Pricing
💡Price Skimming
💡Psychological Pricing
💡Premium Pricing
💡Competitive Pricing
💡Cost Plus Pricing
💡Market Share
💡High Volume Sales
💡Competitive Advantage
Highlights
Penetration pricing involves setting a low initial price to gain market share and increase sales volume.
Penetration pricing is typically used as a short-term strategy with the intention to increase the price after the initial period.
Pure Gym uses penetration pricing by offering a lower introductory cost for new members.
Economy pricing is characterized by selling products at a low cost to attract customers through high sales volume.
Tesco's Everyday Value brand exemplifies economy pricing with its low-cost products.
Price skimming is a strategy where a company charges a high price due to a competitive advantage, often seen in the tech sector.
Sony's PlayStation 4 used price skimming by setting a high initial price that decreased as demand declined.
Psychological pricing influences customer behavior by creating a perception of savings, often using prices like $9.99 instead of $10.
Premium pricing is used by businesses with a strong competitive advantage to convey high quality and exclusivity.
Canada Goose is an example of premium pricing, where high prices are associated with luxury and quality.
Competitive pricing involves setting prices based on the market rate to maintain market share in competitive markets.
Cost-plus pricing adds a desired profit margin to the cost of a product to determine the selling price.
Cost-plus pricing is simple and predictable but may not consider market needs or competitor pricing.
A test with seven statements is provided to reinforce understanding of the pricing strategies discussed.
The video concludes with an invitation for viewers to comment with any questions they may have.
Transcripts
I'm sure we can all agree that the price
of the product is a key influence on its
overall success so let's take a look at
the different pricing strategies that
business can choose from the first
pricing strategy we're going to look at
is penetration pricing this is when a
business price is a product or service
low for the initial purchase typically
through special offers in order to gain
market share through high volume of
sales to customers
this helps to break down barriers to the
market and generates volume but doesn't
always generate profit it just costs as
a short term strategy to gain market
share the key to penetration pricing
being successful is increasing the price
after the initial purchase a good
example of this is pure Jim who entice
people and sign up to a contract for a
set period of time at a lower
introductory cost which then raises
after a set period of time
in this example pure Jim offer the first
three months half price to new members
would no joining fee whatsoever however
once they've signed up the gym
membership the price wards might still
increase to the full price on their
fourth month onwards those provide
impure Jim with a regular profitable
income from that member the next pricing
strategy we're going to look at is
economy pricing as you can see on your
screen right now the value of the Tesco
everyday value fish fingers is just free
pound per kilogram which is much cheaper
than birds eye's alternative which comes
in at 7 pound 15 per kilogram this could
be known as economy pricing this
strategy is widely used in food
retailing where supermarkets sell food
under their own brands such as Tesco's
or a value which is marked an infliction
cost kept to a minimum
therefore the selling price is every low
in comparison to the alternative options
those increase in the quantity of units
sold the key to successfully employing a
profitable economy pricing strategy is
to sell a high volume of the product as
a margin in each unit is so low the next
pricing strategy that we're going to
look at is price skimming price skimming
is where a company charges a higher
price because it has a substantial
competitive advantage
this is a common strategy in the
technology sector when a new and
innovative product is launched typically
there is less competition in the market
and demand for the product is high
therefore price skimming can be utilized
to set reasonable high prices in order
to get high initial returns for
customers who want to buy the products
around the time of its launch a good
example of this would be Sony in the
PlayStation 4 is launched it was priced
at $349,000 a demand for the product
declines so does the price the next
pricing strategy we're going to look at
the psychological pricing business is
you psychological pricing to influence
customers buying behavior typically
encouraging customers to buy products
based on that perception of the cost
being substantial cheaper when in
reality the difference is minimal this
is a very common pricing strategy and is
usually used in combination with other
pricing strategies mentioned in this
video an example of psychological
pricing being used is when a business
sells an item a 114 pound 99 instead of
115 which is also known as a lot digit
effect as you can see on your screen
right now however it is most effective
on larger sums of money such as price on
an item at 999 pound instead of a
thousand pound the next pricing strategy
we're gonna look at is premium pricing
businesses who utilize premium pricing
usually have a strong competitive
advantage within that industry a
neutralising premium pricing will
provide the business with a high profit
margin therefore a high price is set
which psychologically supports the
impression of the business needs
associated products being of the highest
quality and some of the best within that
specific market a good example of
premium pricing being used is Canada
goose cows although there is no doubt
that these coats are made of using some
of the highest quality materials and the
design is at the peak of fashion for
certain target markets the price is
substantially inflated which in this
scenario actually generates more demand
for the coats as they are seen as a
luxury item another pricing strategy is
competitive pricing this particular
strategy involves setting prices based
on what competitors are charging all
known as the going rate it is crucial
that businesses are aware of what
competitors are charging for similar or
the exact same product otherwise they
may lose their market share because of
over fries the products competitor
pricing is most common in businesses who
operate in highly competitive markets
this is because they have a lot of rival
businesses and don't have a sufficient
USPS all the competitive advantage to
price higher than their rivals however
it is key that Business differentiates
itself when using competitive pricing to
entice the customers to shop with them
which could be achieved through
outstanding customer service or
increased availability the final pricing
strategy we are going to look at is cost
plus pricing this is one of the most
traditional pricing strategies within
which the business either purchases or
manufactures a product for a certain
cost and then adds on the margin it
wants to make for example if a retailer
such as Curry's PCWorld purchases one
funnels on samsung tvs the two
hundred-pound I want to make a profit of
50-pound per sale they would add their
intended margin of 50 pound to the cost
price of 200 and this were given the
selling price of 250 pounds
although cost plus pricing has the
advantage of not using a lot of
resources and provides a business with
consistent and predictable returns it is
deemed to be an ineffective strategy if
used in isolation as it doesn't take
into account the needs and wants of the
target market or the price that
competitors are setting let's test your
knowledge on pricing strategies there
are seven statements on your screen
which link to the pricing strategies
that we've looked at today see if you
can identify all seven if you want to
pause the video now and have a go and
then press play when you're ready to go
through all the answers so number one
the price start slowing increases that
links to penetration pricing number two
the price is based on competitors this
is linked to competitive pricing number
three the price reduces by a penny and
can appear significantly cheaper to the
customer psychological pricing than
before
adds the profit margin to the cost to
set the selling price also known as cost
plus pricing
number five uses a high price to
increase the demand
premium pricing number six the price
starts high and decreases over time
price given a number seven a low selling
price and a high sales volume economy
pricing well done if you've got all
seven arrows correct I hope you found
the video useful and if you've got any
questions please comment below
[Music]
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