When setting a price for a product the business will almost certainly want to cover its costs and make a profit as well. Businesses have to decide whether to charge:
There are a number of pricing strategies that a business might use. Some of these strategies are used because the business is trying to expand its sales, while others are to ensure a profit is made.
The cost of a particular job or product is calculated, then a specific percentage is added on top. This is sometimes known as a mark-up, for example, the total cost of repairing a television is £100, if a business adds a 20% mark-up it will charge a total of £120. Some businesses will use cost plus pricing to sell all of the products from a particular factory. It will calculate the total costs and divide it by the number of goods it has made to give the average cost. It will then add a percentage to this to get the final price
When a new product is released it may be possible to charge quite a high initial price. This can be done because being one of the first owners of the product has some prestige or novelty attached to it. Many different prices can be charged as the product becomes less and less in demand, for example when the Play Station first came out Sony charged a very high price, but over time its price has fallen in the hope of attracting more sales.
When a business brings out a new product, it may feel it needs to make a lot of sales to establish itself in the marketplace. It might start off by offering the product at a low price to encourage people to buy. When they reach higher levels of sales they can raise prices. Businesses have done this when they have introduced new chocolate bars and cereals; trial prices are very low and the price gradually rises over time.
This means you sell your goods at a very low price in order to destroy new or existing competitors. Easy Jet believed that British Airways was using destroyer pricing when they introduced the new budget airline, Go. Easy Jet argued that British Airways were setting Go’s pricing very low in the hope of forcing existing budget airlines out of business.
This type of pricing is suitable when the market is competitive and price comparisons are easy to make. Prices in different petrol stations are often the same as it is very easy to compare prices. If one business were to increase its price it is very likely that it would lose a lot of sales as drivers would know that it was more expensive than everyone else.
Some businesses charge different prices to different people for the same goods or service, for example, taxis charge higher prices late at night, rail fares are higher during peak periods and it is more expensive to buy a car in the UK than in France.
Some products are sold below cost in the hope of selling other products. Iceland often advertise two for one deals on the television - deals that they will lose money on. This is done in the hope that when consumers come into their store to take advantage of these offers they will buy other products as well.
This focuses on the consumers’ perceptions of price, for example:
This occurs when a temporary price reduction is made. It is often brought to the customers' attention by using stickers or advertisements, for example, ‘25% off’ or ‘half price’ .