There is a big advantage of cost-based pricing. This is that the business is guaranteed to make a profit on its sales as it covers its costs.
Although there is a danger that the business may not be able to sell expected quantity of the product, as competitors may be selling the same product at a lower price. Also it is nearly impossible to be aware of competitors’ prices and what the market will bear.
Skimming:
Skimming is most often used in the case of the new products when there is little competition in the market.
To start off with the business would usually start of with a relatively high price, in a attempt to “skim” the market. Some people would be willing to pay the higher price because the product is unique and new and few other people would own this product. Once the initial hype of the new product is over and sales begin to drop due to other businesses entering the market, which means they become competition for your product so, in order to maintain sales, the price of your product would be reduced.
The danger of skimming is that people may be deterred by the high price and prefer to wait until the price falls.
Penetration pricing:
This is where a low price is set at the beginning to gain access to an existing market, and where the price slowly increases when the place in the market is secure.
Penetration pricing would be used by new businesses trying to break into or “penetrate” a market. Where there already are well known established sellers. This is suitable for a competitive market.
This method ensures sales, at least in the short term until you start to raise your prices. But it is possible that the prices have to be set so low that profits will be minimal.
Destruction pricing:
This is also known as “destroyer pricing”. It is a strategy which is designed to destroy competitors’ sales or even drive them out of business.
To use this type of pricing the business reduces the price of an existing product or selling a new product at an artificially low price. Even low enough that the business could be suffering a loss for a period of time. Then once the competitors have been driven out of the market prices would be raised. This type of method is suitable for large businesses.
Price wars:
This type of pricing is used in very competitive markets for example grocery stores. Businesses engage in price wars in which prices of goods are cut to a very low level in order to secure sales.
They use this to attract customers to their supermarkets and not there other competitors. Price wars are not popular with businesses.
If pursued long enough, price wars would cut profits seriously and, eventually only the customer benefits by the low prices.
A type of pricing that I did not use was market-led pricing. I did not use this type of pricing as I want to enter the market with my product being slightly higher priced than the other similar products in the market. Although I may come back to market-led once my product has been in the market for a while.
A type of pricing that I did use was cost-based pricing. The reason I used this product is because this is my first product in my business and I do not have much capital to work with. So I am using this type of pricing to make sure my product is making a profit.
I also used skimming for my product. This is a good type of pricing for my product as it is different from the rest of the competition with new technology, which none of the competitors have. So I will have my product being higher priced and try to “skim” the market then once I feel I have done this I will go to market-led pricing.
I did not use penetration pricing as I feel my product is different from all of my competitors and consumers will pay the extra money for my product.
I also did not use destruction pricing and price wars as I am a small business and I would not be able to reduce my prices in this way and may be forced to close.
“Promotion is the process by which businesses inform customers about their products and encourage them to buy those products.”
There are 13 main types of promotion.
- Special offers
- Discounts
- Free samples
- Loss leaders
- Free gifts
- Price reductions
- Money-off coupons
- Price guarantees
- After-sales service
- Savings stamps and tokens
- Customer loyalty cards
- Point-of-sale displays
- Competitions
A types of promotion that I did use were:
Money off coupons- This is where coupons are sent out in the post or can be cut out from newspapers and magazines. Customers save the coupons and can buy the product at a cheaper price. I used this type of promotion as people who were not going to buy the product see that there is a way to get the product cheaper and see this as a great deal and save up coupons and buy the product. Although it is not at full price I am still making a profit and sales are also rising.
Free gifts- This is another type of promotion that I used. This is where a free gift comes with the product. I used this as it does not cost a lot to do this type of promotion but it attracts consumers and they feel they are getting a bargain. The free gift I included was a head cover for the club.
A few types of promotion that I did not use were:
Special offers- An example is “buy two, get one free.” I did not use this type of promotion as my product is not a product that you would buy more than 1 of.
I did not use discounts, loss leaders and price reductions because I can not afford to lower my prices that low because I am a business only starting off and do not have a lot of capital to be losing profits.
Customer loyalty cards- This is where cards are swiped at the check-out and the totals of their purchases are recorded electronically. Each purchase earns points and the points can later be exchanged for cash of Air Miles. Such cards encourage customers to return to the same store in order to build up their points. I did not use this type as this type of promotion is used in stores and supermarkets and I only have one product.
After-sales service- This is used in very expensive item such as a computer. This gives the customer confidence that assistance would be available if required. For this reason, customers are willing to pay a higher price rather than take advantage of a special offer prices in large shops which do not have an after-sales service. I did not use this type of promotion as my product is not the kind that needs service, as it is not a electronic product so it does not break or need fixed.
Advertising is an important aspect of promotion and one in which companies invest large sums of money. They do this in order to:
- Introduce a new product to the public and encourage sales
- Remind the public about an existing product and boost its sales
- Target a new segment of the market, thereby increasing their market share provide information about their products or events.
The advertising I used was:
Internet- This is the fastest growing and most recent form of advertising. Advertisements on the internet have a world-wide audience and can be reached at anytime. They are capable of giving vast amounts of information which can then be saved or printed by the customer. It is possible for the customer to link with the advertisers in order to get further information. This is the reason I used this type of advertising and because from my survey this is the top type of media that my intended audience use. A down side to this advertisement is the internet cannot be accessed by anyone who does not have the necessary equipment.
Magazines- I used this type of advertisement as the target market for my product are likely to read golfing magazines. Magazines are bought by most people and their vast range caters for all interests and age groups. Advertising in magazines can be accurately targeted at the appropriate age group and is, therefore very effective.
