pricing methods Flashcards
(16 cards)
What is cost-plus pricing?
A pricing strategy where the total cost of production is calculated and a markup is added to determine the selling price.
When is cost-plus pricing typically used?
Often used in manufacturing or government contracts where costs are stable and predictable.
What are the advantages of cost-plus pricing?
Simple to calculate; ensures costs are covered and profit is made.
What are the disadvantages of cost-plus pricing?
Ignores market demand and competitor prices; may lead to uncompetitive pricing.
What is competitive pricing?
A strategy where prices are set based on what competitors charge for similar products or services.
When is competitive pricing typically used?
In markets with many similar products and strong competition.
What are the advantages of competitive pricing?
Keeps prices aligned with the market; useful in price-sensitive industries.
What are the disadvantages of competitive pricing?
May lead to price wars; doesn’t consider product differentiation or costs.
What is penetration pricing?
A pricing strategy where a low price is set for a new product to attract customers and gain market share.
When is penetration pricing typically used?
When entering a new market or launching a new product.
What are the advantages of penetration pricing?
Quickly attracts customers; helps build market share and brand recognition.
What are the disadvantages of penetration pricing?
Low profits initially; may attract price-sensitive customers only; hard to raise prices later.
What is price skimming?
A strategy that starts with a high price for a new or innovative product, which is gradually lowered over time.
When is price skimming typically used?
For new, innovative, or high-tech products with little competition.
What are the advantages of price skimming?
Maximizes profits early; recovers R&D costs quickly; appeals to early adopters.
What are the disadvantages of price skimming?
May limit initial sales; attracts competitors; customers may feel cheated when prices drop.
