Pricing decisions are crucial because price influences demand, revenue and brand image. The “right” price depends on costs, competition, marketing objectives and customer perceptions of value.
Factors affecting pricing decisions
- Cost of production – businesses must cover their costs and aim to make a profit.
- Competition – prices may have to match or beat competitors’ prices.
- Market demand – inelastic demand allows higher prices; elastic demand encourages lower prices.
- Business objectives – maximising profit, increasing market share or surviving may lead to different pricing strategies.
- Brand image – premium brands often use higher prices to signal quality.
Pricing strategies
- Cost‑plus pricing – adding a standard mark‑up to the cost of producing a product.
- Competitive pricing – setting a price similar to competitors to maintain market share.
- Penetration pricing – charging a low price when launching a product to gain market share quickly.
- Price skimming – charging a high price for a new or innovative product initially, then lowering it over time.
- Promotional pricing – temporarily reducing prices to increase short‑term sales (e.g. discounts, special offers).
- Psychological pricing – using prices that appear lower (e.g. $4.99 instead of $5) to influence perception.
- Dynamic pricing – adjusting prices in real time based on demand and supply conditions (common in online markets).
Cost‑plus pricing
Advantages: Simple to calculate and ensures that costs are covered with a profit margin.
Disadvantages: Ignores competitors’ prices and customers’ willingness to pay; may lead to prices that are too high or too low.
Competitive pricing
Advantages: Helps maintain market share in competitive markets; reduces the risk of losing customers on price.
Disadvantages: Leaves little room for differentiation; may trigger price wars and lower profits.
Penetration pricing
Advantages: Quickly attracts customers and builds market share; may deter potential competitors.
Disadvantages: Generates low profit margins initially; customers may expect prices to stay low; raising prices later can lose customers.
Price skimming
Advantages: Enables rapid recovery of development costs and creates an exclusive image.
Disadvantages: High initial price limits sales volume and encourages competitors to enter the market; price drops may disappoint early buyers.
Promotional pricing
Advantages: Boosts short‑term sales, clears excess stock and attracts new customers.
Disadvantages: Cuts profit margins and may damage the brand if overused; customers may wait for discounts.
Psychological pricing
Advantages: Makes prices appear lower and can encourage purchases with minimal cost impact (e.g. $4.99 instead of $5).
Disadvantages: Some consumers view it as manipulative; less effective for premium or luxury products.
Dynamic pricing
Advantages: Maximises revenue by responding to real‑time changes in demand and supply (used by airlines and ride‑hailing services).
Disadvantages: May be perceived as unfair if prices fluctuate widely; requires complex data systems; can erode customer trust.
Businesses may use a combination of strategies for different products or at different stages of the product life cycle.
| Strategy | Description | Typical use | Example |
|---|---|---|---|
| Cost‑plus | Add a mark‑up to total cost. | Ensures costs are covered and profit margin achieved. | Restaurants adding 60% to ingredient cost. |
| Competitive | Price similar to competitors. | Markets with many similar products (e.g. petrol stations). | Supermarkets matching rivals’ prices. |
| Penetration | Low initial price to gain market share. | New entrants wanting rapid adoption. | Streaming service offering free trial then low monthly fee. |
| Price skimming | High initial price, lowered later. | Innovative products targeting early adopters. | New smartphone models priced high at launch. |
| Psychological | Prices that seem lower than they are. | Retail goods where perception matters. | $9.99 instead of $10. |
| Dynamic | Prices change in response to demand and supply. | Online platforms, airlines, ride‑sharing services. | Surge pricing in ride‑hailing apps. |
Examples and applications
Retailers often combine pricing strategies. During end‑of‑season promotional pricing, a clothing store may offer “buy one get one free” to clear stock quickly. Supermarkets use competitive pricing by matching rivals’ prices on essentials like milk and bread to attract customers while selling other items at a higher margin. Technology firms frequently launch new devices at high prices (price skimming) aimed at enthusiasts, then lower prices as competition increases.
Online platforms use dynamic pricing: airline tickets become more expensive as seats fill up, and ride‑hailing apps increase fares during peak hours or bad weather when demand outstrips supply. Penetration pricing is common for subscription services such as streaming channels that offer a free trial or discounted rate to entice new users before raising fees later. Psychological pricing makes a product seem cheaper – a coffee priced at $2.95 may appear more attractive than the same drink priced at $3.
