Price Elasticity of Demand(PED) states the percentage change in demand due to a percentage change in price.
2. Competition Based Pricing is where prices are set considering the actions of the competitors. It has two types:
Pricing Strategies
1. Cost Based Pricing includes cost plus/absorption pricing and target pricing
Cost plus/Absorption pricing includes both direct and indirect cost in the cost of production with a percentage of mark up. This is often arbitrary.
Target Pricing is a level of price that will give the business a derived profit that they have targeted.
Advantage: The business will be sure to generate a profit as all costs will be covered
Disadvantage: This type of pricing ignores market conditions
2. Competition Based Pricing is where prices are set considering the actions of the competitors. It has two types:
Going Rate Pricing, where the business charges the same prices as rivals
Predatory Pricing, which is when the price of the product is reduced substantially to drive away competition from the market. Once the competition has left, the price will be raised again to cover the losses.
3.Market Based Pricing occurs when the business analyses the condition of the market(demand factor) before setting the price.
- Penetration Pricing is entering the market with lower price
- Market Skimming is entering the market with a higher price
- Loss Leader refers to reducing the price to gain market share
- Psychological Pricing
- Price Discrimination refers to charging different prices for different groups of customers
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