1.3.3 - Pricing Strategies

Question 1

Def of pricing strategy

Answer 1

The approach which a business decided on for setting the price of its products or services

Question 2

Def of price skimming

Answer 2

Involves launching a brand new products at a high price while the product is unique

Question 3

Def of penetration pricing

Answer 3

This involves launching a new product at a very low price to entice customers to try it

Question 4

How businesses decide between price skimming and penetration

Answer 4

If there is little competition and has no clear rivals, likely to use price skimming but If there were many close competitors this wouldn’t work

Question 5

Advantages of price skimming

Answer 5

• high prices help to create desire-able image for product
• high prices will generate rapid profits - helping to reviver the costs of innovation quickly
• early adopters will pay the high price in return for exclusivity

Question 6

Advantages of price penetration

Answer 6

• low prices boost sales volumes - cutting production costs
• high volumes may persuade retailers to buy the products - boosting distribution
• encourages customers to develop the habit of buying the product

Question 7

Disadvantages of price skimming

Answer 7

• will deter some customers who are put off by price
• early buyers may be frustrated once price starts to fall
• image may suffer when price begins to fall, exclusive perception damaged

Question 8

Disadvantages of price penetration

Answer 8

• products image may be immediately cast as cheap
• upmarket retailers may be unwilling to stock the products
• likely to create price sensitivity among consumers - a higher price elasticity

Question 9

Def of cost plus pricing

Answer 9

This involves deciding price by adding a desires percentage onto total costs per unit

Question 10

Benefit if cost plus pricing

Answer 10

Should guarantee profit is made on each sold unit

Question 11

Drawback of cost plus pricing

Answer 11

Ignoring the market may mean an unrealistic price is guaranteed

Question 12

When is cost plus pricing appropriate

Answer 12

When the firm is a market leader with little need to worry about competition

Question 13

Formula for calculating mark up on unit costs - cost plus pricing

Answer 13

Price charged = unit cost + (% mark-up (usually 10%))

Question 14

Def of predatory pricing

Answer 14

Tactic used by a dominant business to reduce competition. Prices are set lot intended to drive competitors out of the market

Question 15

Benefit of predatory pricing

Answer 15

• Once a rival has been forced to close, prices can be pushed up higher, increasing margins
• more sales

Question 16

Drawbacks of predatory pricing

Answer 16

• If proven, can be illegal

- short term loss

Question 17

Def of competitive pricing

Answer 17

Meaning charging about the same as, or a little less than the prices of competing products

Question 18

Benefit of competitive pricing

Answer 18

• should ensure the price will not put automates off buying the product

Question 19

Drawback of competitive pricing

Answer 19

• firms have little control over the price they charge and the revenue they generate
• competitors could price themselves lower

Question 20

Def of psychological pricing

Answer 20

Used to make price seem more attractive than it actually is by rounding it down

Question 21

Benefits of psychological pricing

Answer 21

• can help nudge customers into making purchase

- increasing sales

Question 22

Drawback of psychological pricing

Answer 22

• reduction in profit margin due to psychological gain. Could be earning more revenue with higher price unit
• may have little effect on many planned purchases and annoy customers

Question 23

6 factors influencing most appropriate pricing strategy

Answer 23

• strength of brand
• stage of product lifecycle
• differentiation and USP
• price elasticity of demand
• competition
• cost and profit

Question 24

How is pricing strategy affected by level of product differentiation

Answer 24

Highly differentiated products will have more control over pricing, potentially allowing them to use cost plus pricing

Question 25

How will price elasticity of demand effect pricing strategy

Answer 25

Inelastic demand means firms can adjust prices without seeing major impacts of demand. Producer of elastic product pushed into competitive pricing strategy

Question 26

Level of competitiveness impacting pricing strategy

Answer 26

If there is little competition then the business can set higher prices due to no substitutes

Question 27

Strength of brand effecting pricing strategy

Answer 27

If a brand is well known, then there will be higher customer loyalty and they can set higher prices

Question 28

Stage in product lifecycle affecting pricing strategy

Answer 28

During introduction, business must consider price skimming or penetration and this will often change as product moves along cycle

Question 29

Cost and the need to make profit affecting pricing strategy

Answer 29

Pricing below unity costs will lead to losses. Balance needed between pushing price above costs to maximise profit and ensuring that the price is relatively competitive

Question 30

Why is pricing sensitive online

Answer 30

Consumers find it easier to compare prices

Question 31

Why may prices online be cheaper

Answer 31

Lower fixed costs because no need to rent costs

Question 32

What type of pricing strategy to price comparison websites encourage

Answer 32

Competitive pricing so their products and services show up as best value in these sites