3.4.3
Pricing Decisions & Price Skimming
Price
Price
There are 4 key factors that influence a business' pricing decisions. Costs and the product life cycle are internal factors affecting pricing. The nature of a product and the degree of competition are external factors.
Costs
Costs
- Costs influence a business' pricing decisions because businesses usually aim to make a profit.
- A business' price and costs determine how much profit the business will make. Businesses cannot afford to set a price lower than their costs forever.
Product life cycle
Product life cycle
- A product's position in the product life cycle helps to determine if a business will charge a high or low price for the product.
- When a new product is launched, businesses may charge higher prices to take advantage of exclusivity.
- When Apple launches new iPhones (like the iPhone X), they charge higher prices. The iPhone X cost $1,000 in Autumn 2017, but this price fell to $850 by February 2018.
Nature of product
Nature of product
- The nature of a product affects pricing in 2 key ways:
- Whether a good is a luxury good or not, will affect how much a business charges.
- Whether the product is hard to differentiate from competitors affects how much a business can charge. If it is similar (homogenous), then businesses usually price at a similar level to competitors.
- For example, in the crude oil market, oil is the same no matter who produces it. This means that there is a uniform price (same price for all businesses and customers) in the market.
Degree of competition
Degree of competition
- The degree of competition affects the pricing decision of businesses because the more competition a business faces, the more options customers have.
- When customers have lots of options for similar products, businesses must compete to attract customers using a lower price.
Setting Pricing - Price Skimming
Setting Pricing - Price Skimming
Price skimming is a pricing method where a business sets a relatively high initial price and then gradually lowers it over time. This is often used before a business faces competition in the market. Once competition arrives, there will be downward pressure on the price to fall.
Maximise revenue
Maximise revenue
- Price skimming is used to try and maximise revenue.
- Consumers who buy early on are willing to pay a higher price but the business can still attract other customers who can pay a lower price later on in the product’s lifecycle.
Cover fixed costs (research and development)
Cover fixed costs (research and development)
- Price skimming can help to recover the costs of research and development, which can be expensive for technology products.
- For example, the Apple iPhone X reportedly cost over $1bn in research and development costs.
Slower unit sales growth
Slower unit sales growth
- A disadvantage of price skimming is that it can slow down the growth of a product and this can give competitors more time to launch a competing product or service.
- A business does not maximise the number of sales at the start so competitors can get more of a chance to enter the market.
1What is Business?
1.1Understanding the Nature of Business
1.2Understanding Different Business Forms
1.3External Environments
2Managers, Leadership & Decision Making
2.1Understanding Management
2.2Understanding Management Decision Making
2.3Understanding Stakeholders
3Decision Making to Improve Marketing Performance
3.1Decision Making to Improve Marketing Performance
3.2Understanding Markets & Customers
3.3Market Segmentation, Targeting & Positioning
3.4Marketing Mix
3.4.1Marketing Mix
3.4.2Product Decisions
3.4.3Pricing Decisions & Price Skimming
3.4.4Pricing Decisions & Price Penetration
3.4.5A-A* (AO3/4) - Pricing & Competition
3.4.6Promotional Decisions
3.4.7Promotional Decisions 2
3.4.8Promotional Decisions 3
3.4.9Distribution Decisions
3.4.10Distribution Decisions 2
3.4.11Digital Marketing
3.4.12Evaluating Digital Marketing
3.4.13A-A* (AO3/4) - The Marketing Mix & Promotion
4Decision Making to Improve Operational Performance
4.1Setting Operational Objectives
4.2Analysing Operational Performance
4.3Increasing Efficiency & Productivity
4.4Improving Quality
4.5Managing Inventory & Supply Chains
5Decision Making to Improve Financial Performance
5.1Financial Objectives
5.2Analysing Financial Performance
5.3Sources of Finance
5.4Improving Cash Flow & Profit
6Improving Human Resource Performance
6.1Human Resource Objectives
6.2Analysing Human Resource Performance
6.3Improving Organisational Design
6.4Improving Motivation & Engagement
6.5Improving Employer-Employee Relations
7Analysing the Strategic Position of a Business
7.1Mission, Corporate Objectives, Strategy
7.2Financial Ratio Analysis
7.3Overall Performance
7.4Political & Legal Change
7.5Economic Change
7.6Social & Technological Environment
7.7Competitive Environment
7.8Investment Appraisal
8Choosing Strategic Direction
8.1Choosing Areas of Competition
8.2Choosing How to Compete
9How to Pursue Strategies
9.1Change in Scale
9.2Assessing Innovation
9.3Assessing Internationalisation
9.4Digital Technology
10Managing Strategic Change
10.1Managing Change
10.2Managing Organisational Culture
10.3Managing Strategic Implementation
10.4Problems with Strategy
Jump to other topics
1What is Business?
1.1Understanding the Nature of Business
1.2Understanding Different Business Forms
1.3External Environments
2Managers, Leadership & Decision Making
2.1Understanding Management
2.2Understanding Management Decision Making
2.3Understanding Stakeholders
3Decision Making to Improve Marketing Performance
3.1Decision Making to Improve Marketing Performance
3.2Understanding Markets & Customers
3.3Market Segmentation, Targeting & Positioning
3.4Marketing Mix
3.4.1Marketing Mix
3.4.2Product Decisions
3.4.3Pricing Decisions & Price Skimming
3.4.4Pricing Decisions & Price Penetration
3.4.5A-A* (AO3/4) - Pricing & Competition
3.4.6Promotional Decisions
3.4.7Promotional Decisions 2
3.4.8Promotional Decisions 3
3.4.9Distribution Decisions
3.4.10Distribution Decisions 2
3.4.11Digital Marketing
3.4.12Evaluating Digital Marketing
3.4.13A-A* (AO3/4) - The Marketing Mix & Promotion
4Decision Making to Improve Operational Performance
4.1Setting Operational Objectives
4.2Analysing Operational Performance
4.3Increasing Efficiency & Productivity
4.4Improving Quality
4.5Managing Inventory & Supply Chains
5Decision Making to Improve Financial Performance
5.1Financial Objectives
5.2Analysing Financial Performance
5.3Sources of Finance
5.4Improving Cash Flow & Profit
6Improving Human Resource Performance
6.1Human Resource Objectives
6.2Analysing Human Resource Performance
6.3Improving Organisational Design
6.4Improving Motivation & Engagement
6.5Improving Employer-Employee Relations
7Analysing the Strategic Position of a Business
7.1Mission, Corporate Objectives, Strategy
7.2Financial Ratio Analysis
7.3Overall Performance
7.4Political & Legal Change
7.5Economic Change
7.6Social & Technological Environment
7.7Competitive Environment
7.8Investment Appraisal
8Choosing Strategic Direction
8.1Choosing Areas of Competition
8.2Choosing How to Compete
9How to Pursue Strategies
9.1Change in Scale
9.2Assessing Innovation
9.3Assessing Internationalisation
9.4Digital Technology
10Managing Strategic Change
10.1Managing Change
10.2Managing Organisational Culture
10.3Managing Strategic Implementation
10.4Problems with Strategy
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