2.2.4

Pricing Decisions & Price Penetration

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Pricing Methods - Price Penetration

Price penetration is where a business tries to increase market share by offering a low initial price. Loss leaders work in a similar way to price penetration.

Increase market share

Increase market share

  • When these goods or services enter the market, a business can attract customers from established competitors.
    • Price penetration was used by Apple when they entered the market for activity trackers by launching the Apple Watch. The Apple Watch competed with products by businesses like Fitbit.
Lower short-term profits

Lower short-term profits

  • In the short term, price penetration can lead to lower average profits than would be earned with a higher price.
  • However, market share may be more important for the long-term profitability of a business.
Loss leaders

Loss leaders

  • Loss leaders are products or services that are sold by a business at a price where the business makes a loss (average revenue < average cost).
  • Loss leaders can attract new customers or sell to existing customers, in the hope that they make extra (incidental) purchases.
    • Dollar Shave Club offered to deliver a razor and new razor blades to your house for $1 every month. This was loss making, but it attracted customers who bought extra products.

Pricing Methods - Competitive and Cost-Plus Pricing

There are 2 other forms of pricing that you need to know about: competitive pricing and cost-plus pricing.

Competitive pricing

Competitive pricing

  • Competitive pricing is when a business sets its prices for its products and services based on what other businesses in the market are charging.
  • Competitive pricing is used when the products in a market are similar.
  • The petrol sold at petrol stations is usually based on competitive prices. In February 2018, all the petrol stations within 3 miles of Derby city centre were charging 121.9p per litre of petrol.
Cost-plus pricing

Cost-plus pricing

  • Cost-plus pricing is a pricing strategy where a business charges the customer based on what it costs to produce the product or service.
  • They work out exactly what it costs to produce the product (or service) on average and then add a “mark-up” (extra amount) on top of this cost to make sure that the business makes a gross profit.
    • For example, if Kwik Fit bought a Dunlop tyre from its suppliers for £80, then if they added a 25% mark-up, then the tyre would be sold to customers for £100.
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1

Exploring Business

1.1

Features of Business Organisations

1.1.1Sole Traders & Partnerships1.1.2Private & Public Limited Companies1.1.3Types of Liability & Not-For-Profits1.1.4Purposes of Businesses1.1.5Purposes of Businesses 21.1.6The Different Economic Sectors1.1.7Multinational Companies1.1.8Stakeholders1.1.9Influence of Stakeholders
1.2

Organisation of Businesses

1.2.1Organisational Structure1.2.2Types of Organisational Structures1.2.3Business Aims & Objectives1.2.4Business Aims1.2.5Business Objectives
1.3

Business Environment

1.3.1External Influences1.3.2Political & Legal Change1.3.3Economic Environment1.3.4Social & Technological Environment1.3.5Lifestyle & Technological Environment1.3.6Corporate Social Responsibility1.3.7The Competitive Environment1.3.8Innovation1.3.9Risk & Uncertainty1.3.10Porter's Five Forces1.3.11SWOT Analysis
2

Marketing Campaigns

2.1

Marketing

2.1.1Setting Marketing Objectives2.1.2Customer Needs2.1.3The Market2.1.4Competition & The Market2.1.5Consumer Behaviour2.1.6Market Research2.1.7Forms of Market Research2.1.8Market Segmentation2.1.9Cultural & Social Factors in Marketing2.1.10Promotional Decisions 32.1.11Pricing Strategies
2.2

Marketing Mix

2.2.1Marketing Mix2.2.2Product Life Cycle2.2.3Pricing Decisions & Price Skimming2.2.4Pricing Decisions & Price Penetration2.2.5Promotional Decisions2.2.6Promotional Decisions 22.2.7Promotional Decisions 32.2.8Market Mapping
3

Business Finance

3.1

Sources of Finance

3.1.1Internal Finance3.1.2External Finance3.1.3External Finance 23.1.4Sources of Business Finance
3.2

Financial Planning

3.2.1Revenue3.2.2Costs3.2.3Cash & Cash Flow3.2.4Cash & Cash Flow 23.2.5Break-Even Analysis3.2.6Profits
3.3

Financial Statements

3.3.1Balance Sheets3.3.2Income Statements3.3.3Liquidity
4

International Business

4.1

Globalisation

4.1.1Growing Economies4.1.2Specialisation & Trade
4.2

International Business

4.2.1Internationalisation4.2.2International Trade4.2.3MNCS4.2.4Conditions that Prompt Trade4.2.5Assessment of a Country
4.3

International Economic Environment

4.3.1Globalisation4.3.2Factors Contributing to Globalisation4.3.3Protectionism4.3.4The EU & the WTO4.3.5Trading Blocs
4.4

Factors Affecting International Business

4.4.1Global Competitiveness4.4.2Ethics of Global Business4.4.3Controlling MNCs4.4.4Cultural & Social Factors in Marketing
5

Principles of Management

5.1

Management & Leadership

5.1.1Managers5.1.2Management Theories5.1.3Managing Organisational Culture5.1.4Management Style
5.2

Theories of Motivation

5.2.1Motivating & Engaging Employees5.2.2Taylor's Theory5.2.3Mayo's Theory5.2.4Maslow's Theory5.2.5Herzberg's Theory
5.3

Managing Change

5.3.1Change5.3.2Key Factors in Change5.3.3Scenario Planning5.3.4Managing Change5.3.5Managing Strategic Implementation
6

Business Decision Making

6.1

Business Principles & Practices

6.1.1Influences in External Environments6.1.2Product Decisions6.1.3Competitive Environment6.1.4Corporate Strategy6.1.5Quantitative Sales Forecasting6.1.6Legislation
6.2

Quality Management

6.2.1Importance of Quality6.2.2Measuring Quality6.2.3Total Quality Management6.2.4Evaluating TQM
6.3

Human Resources

6.3.1Contracts6.3.2Recruitment6.3.3Training a Workforce
6.4

Documents & Business Decisions

6.4.1Sales Forecasts6.4.2Managing Strategic Implementation6.4.3Problems with Strategy

Practice questions on Pricing Decisions & Price Penetration

Can you answer these? Test yourself with free interactive practice on Seneca — used by over 10 million students.

  1. 1
    Characteristics of loss leaders:True / false
  2. 2
    When Apple first released their Apple watch it was sold at a low price to compete with products from companies like Fitbit. What is this an example of?Multiple choice
  3. 3
    Features of competitive pricing:True / false
  4. 4
    What is the "mark-up" in cost-plus pricing?Multiple choice
  5. 5
    If WHSmith buys a set of Sharpie pens for £5 and add a mark-up of 20%, how much will they sell them for?Multiple choice
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Pricing Decisions & Price Skimming

Promotional Decisions