ib business management hl notes

Unit 4.5b - Pricing

UPDATED ON - 18 OCT 2019


  • Self-explanatory – the price of the product
  • Must consider a product’s costs, how much customers are willing to pay, profit targets, competition, etc.

Pricing strategies 

  • Cost-plus pricing
    • Adding a percentage or predetermined amount (markup) to the average cost per unit to set the selling price
    • Ensures a product will produce a contribution
  • Competition-based pricing
    • Price leadership
      • Set by the market leader and other firms simply follow
    • Predatory pricing
      • Temporary reduction in price to drive away competition
      • Can be as aggressive as to sell below cost/at a loss
    • Going-rate pricing
      • Simply pricing at about the average price level of most products in the market
  • Market-led pricing
    • Penetration pricing
      • Newcomers set their prices low to entice people to buy
      • Price changes from low to high
      • Risk: lower prices = lower reputation
    • Price/market skimming
      • Get a feel for what the market is like, set the price high, then as you understand the market better your prices will slowly decrease
      • Prices changes from high to low
    • Price discrimination
      • The price of a product varies per country, which depends on the market; however, the products should not be easily traded
      • Results to the government applying taxes/tariffs
    • Loss of leadership
      • Products are sold at a loss, but regain their losses through their other products
      • e.g. PS3 sold at a loss, but profits are gained through games
    • Psychological pricing
      • Some numbers are more appealing
    • Promotional pricing
      • Offer discounts, rebates, promotions, etc.
      • Assure that your market likes discounts, otherwise, there will be no reason in offering the promotions

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