(PAPER 3) 1.3.3 pricing strategies

Question 1

price definition

Answer 1

how much customers are charged for a product

Question 2

penetration pricing definition

Answer 2

(for new products) low prices to enter the market and gain market share

Question 3

price skimming definition

Answer 3

(for new products) charge high prices to enter the market and then lowers it over time.

Question 4

cost plus pricing definition

Answer 4

(for existing products) involves deciding price by adding a desire percentage onto total cost/ unit

Question 5

competitive pricing definition

Answer 5

(for existing products) changing a price at the market average or at a discount to the average price in market

Question 6

predatory pricing definition

Answer 6

(for existing products) sets prices low enough to force a competitor out of business

Question 7

psychological pricing definition

Answer 7

(for existing products) used to make fine-tuned decisions on the price of charge, prices are set just below major psychological levels e.g. £9.99 instead of £10

Question 8

loss leader definition

Answer 8

(for existing products) making a loss on one product but charge a higher price on a related product e.g. printer ink

Question 9

+&- of penetration pricing

Answer 9

+ high levels of sales should cover some of the development price
- customers might think it is low quality

Question 10

+&- of price skimming

Answer 10

+ people presume they will get very high quality product

- people may not buy it if its too expensive

Question 11

+&- of cost plus pricing

Answer 11

+ should guarantee a profit is made on each unit sold

- ignoring the market may mean an unrealistic price is generated

Question 12

+&- of competitive pricing

Answer 12

+ should assure that price will not put customers off buying the product
- firms that use a competitive pricing strategy have little control over the price they charge thus the revenue they generate

Question 13

+&- of predatory pricing

Answer 13

+ once a rival has been forced to close prices can be pushed up higher in the market
- if it can be proven to be specifically designed only to drive rivals out of the business

Question 14

+&- of psychological pricing

Answer 14

+ this can help nudge customers into making a purchase by helping them to believe they are not spending £10 but £9.99 or £100 but £99.99

Question 15

+&- of loss leader

Answer 15

+ higher profit margin on the related product- sold frequently

• make a loss on the main product
• brand image- cheap

Question 16

Factors determining the most appropriate pricing strategy for a particular situation

Answer 16

> differentiation and USP 
> price elasticity of demand 
> level of competition 
> strength of the brand 
> stage in the product life cycle 
> cost and need to make profit