Marketing Mix - Price Flashcards
What is price skimming?
Setting a high price before other competitors enter the market to maximise profit
When is price skimming most commonly used?
During the launch of a new product which faces little or no competition (in the introduction or early growth stage of the product life cycle)
What is the main objective of price skimming?
To maximise profit early on in order to cover high development costs
State an advantage of using price skimming
- Effective for products that create excitement amongst early adopters
State a disadvantage of using price skimming
- Effects aren’t felt for long as competitors soon launch rival products that put pressure on the price
- The high pricing may put some consumers off: when competitors launch products for a cheaper price they are likely to poach potential customers, thereby reducing sales volume
What is penetration pricing?
Introducing a product to the market at a lower price than competitors in order to attract new customers
State three advantages of penetration pricing
- It forces the business to focus on minimising unit costs from the very start
- The low price can act as a barrier to entry for other potential competitors
- Sales volume should be high, so distribution may be easier to obtain
- The low price may lead to an increase in consumer recommendations and a stronger brand image
State three disadvantages of penetration pricing
- The initial low price can create an expectation for constant low pricing: a failure to do so may lead to customer dissatisfaction and a fall in sales volume
- It may simply attract consumers who are looking for a bargain: customer loyalty might not exist
- Likely to result in retaliation from established competitors who hope to keep their market share
What is price discrimination?
Charging different prices to different market segments
What is a loss leader?
A product that is deliberately sold well below the average selling price in order to encourage customers to purchase the business’ other goods at full price
What is price elasticity of demand?
The responsiveness of a product’s demand to a change in price
What does it mean when products are price elastic?
A rise in price leads to a fall in sales
What does it mean when products are price inelastic?
A rise in price will not see a significant fall in sales
What is income elasticity of demand?
The responsiveness of a product’s demand to a change in income
What does it mean when products have a positive income elasticity of demand?
As consumer income rises demand goes up
