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Is The Price Right?

Updated Friday, 10th June 2005

We look at some different approaches used for pricing products

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David Dickinson Copyrighted  image Icon Copyright: BBC

If you are starting in business you can’t influence what your competitors charge. Nor can you influence what income a consumer has. What you can influence is how likely a consumer is to buy your product. This will depend on two things:

  • how you price your product relative to others in the market
  • the extent to which your product provides what the consumer wants.

The consumer’s willingness to buy will depend on these two factors. So what are your choices for pricing your product?

 

There are five approaches to pricing:

  1. If your aim is high-volume sales with low production costs you could go for penetration pricing. From day one you charge your long-term good value price in the hope that this will deter potential competitors.
  2. If you need to attract initial customers you could go for loss leading instead. Here you offer products and services below cost in the hope of building up repeat business.
  3. If you are trying to move into a second market, you could try marginal pricing. The idea here is that your sales in the first market will cover all your fixed costs. As long as you make more from your extra sales in the second market than the cost of producing those extra goods or services, then your overall profit will increase.
  4. If you think you have a short-term competitive advantage in a market, you can do the opposite and go for skimming. Here you charge as high a price as you can but recognise it will not last for ever.
  5. Finally, if you think you have a good idea of what consumers will pay for a product, you can try market-based pricing and charge a price just below where you think you will meet consumer resistance.
 

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