Pricing Strategies

Inaddition to adopting particular pricing method, a firm I: can also follow a number of pricing strategies or tactics. The more common of these include:

Penetration pricing is a tactic adopted by a company when it is first entering (or penetrating) a market and is trying to establish a market share. It tends to be used where there is very little or no consumer 'brand loyalty'and the demand for the goods is price elastic.

Skimming price is where a firm charges a high price for a product in order to 'skim' the 'top end'of the market. It is most likely to be found where the product is new and consumers have not had a chance to establish a 'price plateau'. This refers to the price that consumers expect to pay for a product, e.g. would anybody expect to pay 40p for a standard size Mars bar? Clearly this would be above the price plateau. When products are new, a price plateau has not had the chance to be established and some consumers are willing to pay a high price to buy the new product because of its novelty value.

Loss leader pricing is when firms offer prices below the cost of producing the item (hence making a loss) in order to encourage the sale of the products. Supermarkets frequently adopt this tactic to encourage people into the stores so that once inside they may buy additional items on impulse.

Limit-pricing occurs when a firm, which normally has a large market share, drops the price of its product to limit or deterthe entry of other new competitors. The success of this strategy depends on the size of the price drop, the potential profits to be gained by new firms, and the determination of other firms to enter the industry.

Predatory pricing typically occurs when a firm holds the price of its product below those of its rivals for long periods of time in the hope of drivingthem outof the industry and establishing a monopoly position.

Dumping pricing happens when a firm 'dumps' its goods into a market at below the cost of producing them in the hope that it can establish a foothold in the market. Once a market has been established the price of the product may rise to those of competitor firms.

Competitive pricing is when the firm prices its product in line with those of its competitors. There is little price variation between the types of goods being sold. In this situation there may be a substantial amount of 'non-price' competition,e.g. on packaging and design of the product.

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