When businesses want to compete with competitors, they may use one of numerous methods in order to encourage the sale of their products.
Psychological Pricing involves selling products and services at prices that people wrongly assume they are cheaper than they are, an example would be selling a product for £1.99, the aim is that the potential customer would often round down, and assume that the price of the product was £1, rather the fact that it is much closer to £2.
- Highly effective for large purchases, such as holidays, as the rounding amount is much larger.
- A study by Marketing Bulletin showed that over 60% of prices in advertising materials ended in a 9.
- A further study also concluded that a lot of customers base what price the product is worth on the left digit, so would assume a product is less than it actually is.
- When a set of prices are listed, it is often displayed with the higest price first, this is because it sets the perceived value of the rest of the products, and lower priced products are therefore considered higher value.
Some customers may not fall for the pricing strategy and could result in lost revenue as the business could have charged for the full perceived amount, and the impact of physiological pricing other than sales data is hard to quantify (not that sales data isn’t a good metric, however because the theory is mostly psychological the business cannot reliability take estimates)
Penetration Pricing involves selling a product for a low price at the start of its product life cycle, the aim of this is to improve sales as customers will take advantage of the low price, after the customers have repeat purchased and familiarised with the product and brand, the business will start to raise the price of the product, the aim of this being that the new customers will continue to buy the new high price product.
- This allows a product to gain market share quickly.
- This allows customers to become familiar with a product and brand.
Some Customers however may not be willing to pay the higher prices.
Some businesses will compete to get the lowest price, and thus engage in price wars, this is beneficial to the consumer as it means that they always get the lowest price however businesses find that they may overall loose revenue.
- This means that the consumer will have a lower price to pay, however they may find that businesses may start to not stock products that are too competitive as they simply cannot compete.
- Competition may become reduces which may be damaging in the long run.
Price skimming involves setting a high price to maximise profits of a particular product, this is most common in technology markets where the demand for products can be extremely lucrative.
- Price skimming only works on new product releases
- Price skimming can work effectively where early adopters are excited to own the product.
A loss leader is someone who sells below the normal price point in order to bring in customers for another motive, such as them browsing other parts of the store or to drive out competition.