Page 156 - DMGT310_ENTREPRENEURSHIP_AND_SMALL_BUSINESS_MANAGEMENT

Unit 10: Marketing Considerations

Penetration Pricing Notes

The price charged for products and services is set artificially low in order to gain market share.
Once this is achieved, the price is increased. This approach was used by France Telecom and Sky
TV. These companies need to land grab large numbers of consumers to make it worth their
while, so they offer free telephones or satellite dishes at discounted rates in order to get people
to sign up for their services. Once there is a large number of subscribers prices gradually creep
up. Taking Sky TV for example, or any cable or satellite company, when there is a premium
movie or sporting event prices are at their highest – so they move from a penetration approach
to more of a skimming/premium pricing approach.

Economy Pricing

This is a no frills low price. The costs of marketing and promoting a product are kept to a
minimum. Supermarkets often have economy brands for soups, spaghetti, etc. Budget airlines
are famous for keeping their overheads as low as possible and then giving the consumer a
relatively lower price to fill an aircraft. The first few seats are sold at a very cheap price (almost
a promotional price) and the middle majority are economy seats, with the highest price being
paid for the last few seats on a flight (which would be a premium pricing strategy). During times
of recession economy pricing sees more sales. However it is not the same as a value pricing
approach which we come to shortly.

Price Skimming

Price skimming sees a company charge a higher price because it has a substantial competitive
advantage. However, the advantage tends not to be sustainable. The high price attracts new
competitors into the market, and the price inevitably falls due to increased supply.
Manufacturers of digital watches used a skimming approach in the 1970s. Once other
manufacturers were tempted into the market and the watches were produced at a lower unit
cost, other marketing strategies and pricing approaches are implemented. New products were
developed and the market for watches gained a reputation for innovation.

Psychological Pricing

This approach is used when the marketer wants the consumer to respond on an emotional,
rather than rational basis. For example Price Point Perspective (PPP) 0.99 Cents not 1 US Dollar.
It’s strange how consumers use price as an indicator of all sorts of factors, especially when they
are in unfamiliar markets. Consumers might practice a decision avoidance approach when
buying products in an unfamiliar setting, an example being when buying ice cream. What
would you like, an ice cream at $0.75, $1.25 or $2.00? The choice is yours. Maybe you’re entering
an entirely new market. Let’s say that you’re buying a lawnmower for the first time and know
nothing about garden equipment. Would you automatically by the cheapest? Would you buy
the most expensive? Or, would you go for a lawnmower somewhere in the middle? Price
therefore may be an indication of quality or benefits in unfamiliar markets.

Product Line Pricing

Where there is a range of products or services the pricing reflects the benefits of parts of the
range. For example car washes; a basic wash could be $2, a wash and wax $4 and the whole
package for $6. Product line pricing seldom reflects the cost of making the product since it
delivers a range of prices that a consumer perceives as being fair incrementally – over the range.

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