Pricing Strategies Explained

Two Teachers

18 Oct 201907:17

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

00:00

💹 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.

05:01

📊 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

Pricing strategies are methods businesses use to set the prices of their products or services. They can significantly influence consumer behavior and market share. In the video, various pricing strategies are discussed to illustrate how businesses can use them to achieve different objectives, such as gaining market share or maximizing profits.

💡Penetration Pricing

Penetration pricing is a strategy where a business sets a low initial price for a product to attract customers and gain market share. The goal is to increase sales volume and then raise the price later. An example from the script is Pure Gym, which offers a lower introductory price for the first three months to entice new members.

💡Economy Pricing

Economy pricing involves setting prices lower than competitors to attract price-sensitive customers. It's often used in retail, especially with store brands. The video mentions Tesco's 'Everyday Value' fish fingers as an example, which are priced significantly lower than a branded alternative to drive sales volume.

💡Price Skimming

Price skimming is a strategy used when a new product is launched with a high price to capitalize on the initial high demand and lack of competition. The script uses the example of Sony's PlayStation 4, which was priced high at launch to maximize profits before competitors entered the market.

💡Psychological Pricing

Psychological pricing is a strategy that uses prices ending in .99 or .95 to make products seem cheaper to consumers. It plays on the psychological perception of value. The video gives an example of a product priced at £114.99 instead of £115 to illustrate this concept.

💡Premium Pricing

Premium pricing is a strategy where businesses charge a higher price to reflect a perception of high quality or luxury. The video cites Canada Goose jackets as an example, where high prices are justified by the use of high-quality materials and a strong brand reputation.

💡Competitive Pricing

Competitive pricing involves setting prices based on what competitors charge. This strategy is crucial in highly competitive markets where businesses must match or slightly undercut competitors' prices to maintain market share. The video emphasizes the importance of differentiating the product or service in some way when using this strategy.

💡Cost Plus Pricing

Cost plus pricing is a traditional strategy where businesses add a set profit margin to the cost of producing or purchasing a product to determine the selling price. The video explains that while this method is simple and predictable, it may not consider market needs or competitor pricing.

💡Market Share

Market share refers to the percentage of the total market a business holds. The video discusses how pricing strategies like penetration pricing can be used to increase market share by attracting more customers with lower prices.

💡High Volume Sales

High volume sales mean selling a large quantity of products at a lower price point. This is a key aspect of strategies like penetration and economy pricing, as seen in the video with the examples of Pure Gym and Tesco's Everyday Value products.

💡Competitive Advantage

A competitive advantage is a characteristic or strategy that gives a business an edge over its competitors. The video discusses how businesses with a strong competitive advantage, like Sony with the PlayStation 4, can use price skimming to charge higher prices initially.

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.