1.3.3 Pricing Strategies

Question 1

What is Dynamic Pricing?

Answer 1

Adjusting price depending on demand.

Note: It is applied to products/services where demand fluctuates E.G. Hotel rooms

Question 2

What is Penetration Pricing?

Answer 2

Initial price is low in order to undercut competitors. Overtime price may increase as demand and reputation builds.

Note: Typically applied to new products attempting to enter a mass market

Question 3

What is Price Skimming?

Answer 3

Initial price is high so that profit can be ‘skimmed’.

Note: Usually applied to brands (especially technology) where product anticipation is high

Question 4

What is cost-plus pricing?

Answer 4

Adding a markup to the cost of goods and services to arrive at a selling price

Note: Effective as it considers the profit margin the business is willing to accept

Question 5

What is Competitive Pricing?

Answer 5

The business sets prices similar (set prices the same or just below) to competitors so customers judge products/services based on non-price factors

Question 6

What is Predatory Pricing?

Answer 6

Business sets prices extremely low in order to drive competitors out of the market.

Note: Mainly used by monopolies and oligopolies to hold off the threat of a new entrant into the
market .
Predatory pricing is illegal in in EU, UK and US.

Question 7

What is Psychological Pricing?

Answer 7

Business set prices just below the next whole number to trick consumers into thinking its cheaper than it actually is.

E.G. £9.99 as opposed to £10

Question 8

What factors determine the most appropriate pricing strategy?

Answer 8

1. Number of USP’s / Amount of differentiation
   - A product with a strong USP would be able to charge a higher price because it is highly
   differentiated from any competitor products.
2. Price Elasticity of Demand
   - Depends on availability of substitutes, type of product, whether it’s an expensive purchase,
   strength of the brand
   - If customers are sensitive to changes in price i.e. the product is price elastic then a business
   might keep prices similar to competitors
3. Level of competition in the business environment
   - If the market is dominated by a few large businesses, other businesses will follow a strategy
   of competitive pricing
   - Businesses may choose a strategy of predatory pricing in order to reduce the level of
   competition in the market
4. Strength of Brand
   - A strong brand adds value allowing a business to charge a premium price
5. Stage in the product life cycle
   - When launched onto the market a business may choose skimming or penetration pricing
   depending on the nature of the product
   - If sales are declining then the price may be reduced
6. Costs and the need to make a profit
   - A business will need to set a price that covers costs in order to make a profit and may
   therefore use cost-plus pricing

5.

Question 9

What ways adapt price to reflect social trends?

Answer 9

1. Auction sites
2. Price Comparisons sites
3. Personalised pricing
4. Subscription pricing

Question 10

How do auction sites adapt price to reflect social trends?

Answer 10

Auction sites gain the best prices through a sense of urgency, encouraging people to bid so they don’t miss out.

Question 11

How do price comparison sites adapt price to reflect social trends?

Answer 11

Make it easy for customers to compare prices and choose the best deal.

Note: Helps businesses remain competitive in a dynamic market.

Question 12

Hoes does personalised pricing adapt price to reflect social trends?

Answer 12

Technology and online databases collect customer information and allow businesses to target therm with a personal price.

Question 13

How does subscription pricing adapt price to reflect social trends?

Answer 13

Businesses charge customers a monthly fee to use a service.