1.3.3 - Pricing Strategies

Question 1

Define Pricing?

Answer 1

The process of pricing is the choice of pricing strategy that a business makes when setting prices for their products or services

Question 2

What are the 6 Pricing Strategies?

Answer 2

Cost plus
Price skimming
Penetration
Predatory
Competitive
Psychological

Question 3

Define Cost Plus Pricing?

Answer 3

• A cost-plus pricing strategy seeks to set a price for a product or service which covers the costs AND provides a good profit margin for the business
• Cost-plus is the most logical approach to pricing because it achieves the business objective of maximising profits

Question 4

Define the Price Skimming Strategy?

Answer 4

• A skimming price strategy is used when launching a new product
• The price is set high to start, this will create high profits and may be used to pay back high Research and Development (R&D) costs
• Usually used in technological or very innovative products which have few competitors
• As competitors eventually enter the market the price is then reduced

Question 5

Define Penetration Pricing?

Answer 5

• This means setting prices really low on a new product to encourage sales and to persuade customers to try the product. Then when they like the product and have to keep buying it the business raises the price
• Low prices should gain the business more market share (market penetration)

Question 6

Define Competitive Pricing?

Answer 6

• Someproductsorservicesare priced in line with competitors
• This means that customers will have to judge a product or service on “non-price” methods such as; quality of service or speed
• Strategy usually used where products in a market are all very similar

Question 7

Define Predatory Pricing?

Answer 7

• In oligopolies (markets with just a few large businesses e.g. budget airlines) existing businesses may hold off the threat of a new entrant to the market by lowering their prices so that any competitor cannot make a profit.
• This is when aggressive price cutting is used to deter competitors or push them out of the market

Question 8

Define Psychological Pricing?

Answer 8

• Setting a price slightly below a round figure
• Thismeanspricingaproductat £1.99 rather than £2.00 to appear cheaper
• Somebusinessesconsiderpricing carefully as it is often an indicator of quality

Question 9

Name the factors that determine a Pricing Strategy?

Answer 9

1. number of USPs/amount of differentiation
2. price elasticity of demand
3. level of competition in the business environment
4. strength of brand
5. stage in the product life cycle
6. costs and the need to make a profit

Question 10

How does the number of USPs/amount of differentiation determine a pricing strategy?

Answer 10

• A USP is a unique selling point – it is the unique details or features of the product that differentiates it from its rivals

Question 11

How does the price elasticity of demand determine a pricing strategy?

Answer 11

• Elastic demand:
• Homogenous products which have lots of substitutes will have to price close to competitors
• Too high and consumers will switch to alternatives
• Too low and consumers may perceive the product as inferior to comparable
• Inelastic demand
• Unique products which have few alternatives will be able to command premium prices as consumers will be unable to switch and therefore willing to pay the price

Question 12

How does the level of competition in the business environment determine a pricing strategy?

Answer 12

• No business works in isolation so a change in the price of one business may result in the change of all the others
• The availability of substitute products will affect business pricing decisions
• If a business wants to establish and maintain loyal customers it will need to match or have similar prices to its competitors

Question 13

How does the strength of the brand determine a pricing strategy?

Answer 13

• A brand helps to define a business in the eyes of a consumer
• A strong brand can charge higher prices because consumers will pay the higher price for the strong brands

Question 14

How does the stage in the product life cycle determine a pricing strategy?

Answer 14

• Products in the launch phase may use skimming if the if the product is unique and the business wants to claw back the R&D costs.
• Products in growth or maturity phase may decide to price closer to competitors – after new imitations enter the market place.
• Products in the maturity or decline phase may be priced lower to clear stocks before a new product is introduced.