Pricing Decisions (4)

Question 1

What is price skimming?

Answer 1

Involves charging high prices when a new product is furst launched on the market, maximising short-term profitability

Question 2

What is the aim of market skimming?

Answer 2

Gain high unit profits early in the product’s life

Question 3

What if the product moves into the later stages of its life cycle?

Answer 3

Progressively lower prices will be charged

Question 4

Early stages of a product lifecycle?

Answer 4

There is heavy spending on advertising and sales promotion to obtain sales

Question 5

When is market skimming useful (new and different)

Answer 5

The product is new and different, so early adopters are prepared to pay high prices to be seen to own the latest products

Question 6

When is market skimming useful (unknown)

Answer 6

The strength of demand and sensitivity of demand to price are unknown

Question 7

When is market skimming useful (high initial cash outflows)

Answer 7

High prices in early stages of a product’s life might generate high initial cash outflows. useful for firm with liquidity problems

Question 8

When is market skimming useful (short life cycle)

Answer 8

Product has a short life cycle and needs to recover development costs and make a profit quickly

Question 9

What is price discrimination?

Answer 9

Practice of charging different prices for the same product to different groups of buyers when these prices are not reflective of cost differences

Question 10

What happens when a company can sell into two or more separate markets?

Answer 10

Might be able to charge a different price in each market

Question 11

How can the company be successful for price discrimination?

Answer 11

Company must prevent the transfer of goods from the cheap market to the more expensive one

Question 12

Bases for discriminating prices?

Answer 12

By market segment, product version, place and timeh

Question 13

How can price dscrimination only be effective if (segmentable)

Answer 13

Market must be segmentable in price terms, and different sectors must show different intensities of demand

Question 14

How can price dscrimination only be effective if (black market)

Answer 14

Little to no chance of a black amrket developing

Question 15

How can price dscrimination only be effective if (competitors)

Answer 15

Little to no chance that competitors can and will undercut firm’s prices in higher priced market segments

Question 16

How can price dscrimination only be effective if (segmenting and administering)

Answer 16

Cost of segmenting and administering the arrangements should not exceed extra revenue derived from price discrimination strategy

Question 17

What is product-line pricing?

Answer 17

Product line may be a range of branded products, and a consistent pricing policy should be applied to all products in the range

Question 18

Where is focus placed in product-line pricing?

Answer 18

On the profit from the whole range rather than the profit on each single product

Question 19

Product line pricing strategies (proportional)

Answer 19

Set prices proportional to full or marginal cost with same % profit margin for all products

Question 20

What are prices dependent on?

Answer 20

Prices are dependent on cost and ignore demand

Question 21

Product line pricing strategies (demand relationship)

Answer 21

Set prices reflecting the demand relationships between products so that an overall required rate of return is achieved

Question 22

Product line pricing strategies (customer opinion)

Answer 22

Set prices that reflect customer opinion about quality of products, and how they compare with similar products of competitor organisations