Unit 5.4 - price

Question 1

Name the different pricing strategies. (7)

Answer 1

Cost plus
Competitive
Penetration
Price Skimming
Psychological
Loss leader
Price discrimination

Question 2

Define cost plus pricing.

Answer 2

Setting a price based on adding all of your costs together and then adding a mark up

Question 3

Define competitive pricing.

Answer 3

Matching prices with similar businesses or setting it slightly lower than similar businesses

Question 4

Define penetration pricing.

Answer 4

When a firm sets a market price that is lower than the current price to attract customers​, which increases to a more competitive level over time

Question 5

Define price skimming.

Answer 5

When a firm sets a high price to target early adopters and yield a high profit margin, over time the price begins to fall to a competitive level

Question 6

Define psychological pricing.

Answer 6

A tactical pricing strategy which intends to give the impression of value

Question 7

Define loss leader pricing.

Answer 7

A tactic in which a firm sets a low price for its product(s) in order to encourage consumers to buy other products that provide profit for the firm

Question 8

Define price discrimination.

Answer 8

A strategy whereby businesses charge different prices to different customers for the same product

Question 9

Name the factors that influence the price of a product.

Answer 9

Costs
Demand
Competitors pricing/market price
Stage in the product lifecycle
Strength of the brand
Nature of the market
The rest of the marketing mix
The business’s objectives
Pricing techniques

Question 10

Explain the difference between cost plus and market led pricing.

Answer 10

Cost plus pricing is when a business will charge a price based on the production costs and a mark-up to allow a profit to be made​ whereas market led pricing a business will charge a price based on an analysis of the market and consideration of the price customers are likely to be willing to pay

Question 11

Name the advantages (3) and disadvantages (3) of competitive pricing.

Answer 11

The business should be in line with its rivals
Prevent loss of market share
Boost gross profit margins
The business has got to think of some other way to attract customers e.g., better service, better choice etc
Businesses may have different costs than competitors
Could be costly for newer or smaller businesses

Question 12

Name the advantages (2) and disadvantages (2) of price skimming.

Answer 12

Helps recover investment costs in early stages of life cycle
Maximise profit margins at the beginning
Can be an issue if competitors come in with lower prices
Customers may wait for the price to fall before purchasing

Question 13

Name the advantages (2) and disadvantages (4) of penetration pricing.

Answer 13

Customers may come back for more
Reduces competition who can take time to react
False loyalty
Brand damage
People may be unwilling to pay the price when it increases
If the price is too low customers may think it is of poor quality

Question 14

Name the advantages (4) and disadvantages (4) of cost plus pricing.

Answer 14

Simple method - easy to calculate if you know the costs
Company knows what it will receive if it gets the price right
Each product sold at a profit
Price increases are implemented when costs rise
Doesn’t take into account competitors
Profit lost if price set below what customers are prepared to pay
Sales are lost if price is set above the price customers are willing to pay
Business has less incentive to control costs

Question 15

Name the advantages (2) and disadvantages (4) of loss leader pricing.

Answer 15

Can attract new customers
Increases sales of other more profitable products
Need to ensure there is enough stock
Need to make sure the loss isn’t too great
Customers may expect low prices all the time
Better as a short term strategy

Question 16

Name the advantages (1) and disadvantages (3) of psychological pricing.

Answer 16

Customers feel they have a good deal and may return
Company must understand how customers will react
No sales guarantee
Can affect a brands reputation

Question 17

Name the advantages and disadvantages of discrimination pricing.

Answer 17

Attract customers
Customers may feel excluded and choose rival businesses

Question 18

Name the advantages (5) and disadvantages (4) of pricing strategies.

Answer 18

There is the prospect of increased sales if the right pricing strategy is chosen. This will lead to an increase in sales, which leads to an increase in revenue which could result in profits rising​
Prices can be applied to specific niche market segments, which means that a higher price may be charged without demand being affected​
Prices can reflect the market for the product. For example, skimming may work in some markets, such as high income, luxury markets, whilst penetration works better in others​
Prices can be set to consider the actions of competitors which can stop consumer switching to rival firms​

Competitors may follow the pricing strategy meaning that there is no effect caused by a change in pricing strategy and no increase in sales​
Competitors may not follow the pricing strategy and customers may not be attracted anyway​
Expensive advertising campaigns may be needed to promote a new pricing strategy which means that profits are not as likely due to the increase in advertising costs​
Some segments of the market may not be happy with a pricing strategy, such as allowing less well-off people to afford expensive products​