chapter 13

Question 1

what is cost plus pricing

Answer 1

total cost/output x %markup

Question 2

advantages of cost plus pricing

Answer 2

1.quick and easy to workout price
2.ensures that price covers all cost

Question 3

disadvantages of cost plus pricing

Answer 3

price may be set higher than competitors, this reduces sales and profits

Question 4

what is price skimming

Answer 4

Setting a high price for a new product that is unique and has a novelty factor, since it offers a novelty factor the price is higher to cover the high costs of research and development

Question 5

advantages of price skimming

Answer 5

1.Helps recover research and development costs
2.the high price may help in creating a quality image for the product

Question 6

disadvantages of price skimming

Answer 6

may put off some potential customers because of the high price

Question 7

what is penetration pricing

Answer 7

when price is set lower than competitor’s price to be able to enter a new market, once customer loyalty has been gained, price will increase to a similar level as the competitor

Question 8

advantages of penetration pricing

Answer 8

1.attract customers quickly and help product become more established
2.increase market share quickly

Question 9

disadvantages of penetration pricing

Answer 9

1.possible loss of revenue due to lower prices
2.cannot recover development costs quickly

Question 10

what is competitive pricing

Answer 10

when the product is priced in line with or just below the competitor’s prices, this is done for already established products in the market

Question 11

advantages of competitive pricing

Answer 11

prices are at a realistic price, high sales

Question 12

disadvantages of competitive pricing

Answer 12

Still need to find ways of competing to attract sales.

Question 13

what is promotional pricing

Answer 13

when a product is sold at a very low price for a short period of time

Question 14

advantages of promotional pricing

Answer 14

1.useful for getting rid of unwanted stock
2.helps in renewing interest in a business if sales are failing

Question 15

disadvantages of promotional pricing

Answer 15

revenue on each item will be lower so profits may be lower

Question 16

what is psychological pricing

Answer 16

1.charging a very high price for a high quality product(status symbol)
2.charging a price just below a whole number

Question 17

what is dynamic pricing

Answer 17

when customers are split in two or more groups based on their demand level

Question 18

Factors that affect what pricing method should be used:

Answer 18

1.is it a new or existing product?
If it’s new, then price skimming or penetration pricing will be most suitable. If it’s an existing product, competitive pricing or promotional pricing will be appropriate.
Is the product unique?
If yes, then price skimming will be beneficial, otherwise competitive or promotional pricing.
Is there a lot of competition in the market?
If yes, competitive pricing will need to be used.
Does the business have a well-known brand image?
If yes, price skimming will be highly successful.
What are the costs of producing and supplying the product?
If there are high costs, costs plus pricing will be needed to cover the costs. If costs are low, market penetration and promotional pricing will be appropriate.
What are the marketing objectives of the business?
If the business objective is to quickly gain a market share and customer base, then penetration pricing could be used. If the objective is to simply maintain sales, competitive pricing will be appropriate.

Question 19

define price elasticity of demand

Answer 19

measure of the responsiveness of demand to a change in price