1.3.3 Pricing Strategies

Question 1

Price Skimming

Answer 1

High desirability factor e.g. iPhone. This involves launching a brand new product at a high price while the
product is unique.

Question 2

Penetration pricing

Answer 2

This involves launching a new product at a very low price to entice
customers to try it.

Question 3

Price skimming advantages

Answer 3

• High prices help to create a desirable image for the product • Early adopters
will pay the high price in return for
exclusivity • High prices
generate rapid profits - helping to
recover the costs of innovation quickly

Question 4

Price skimming disadvantages

Answer 4

Will deter some customers with price
seen as a rip-off' • Early buyers may
be frustrated once price starts to fall
• Image may suffer when prices begin
to fall

Question 5

Price penetration advantages

Answer 5

Low prices encourage
lower-risk product
sampling
• Low prices boost sale
volumes - cutting
production costs
• High volumes may
persuade retailers to buy
the product - boosting
distribution
• Encourages customers to
develop the habit of buying
the product

Question 6

Price penetration disadvantages

Answer 6

Product's image may be
immediately cast as cheap
• Upmarket retailers may
be unwilling to stock the
product
• Likely to create price
sensitivity among
customers - a higher price
elasticity

Question 7

For NEW products

Answer 7

Price skimming or price penetration

Question 8

For EXISTING products

Answer 8

Cost-plus, predatory, competitive, psychological

Question 9

Cost-plus pricing

Answer 9

This involves deciding price by adding a desired percentage onto total
costs per unit: Price charged = unit cost + (% mark-up)

Question 10

Benefit of cost-plus

Answer 10

This should guarantee a profit is made on each unit sold.

Question 11

Drawback of cost-plus

Answer 11

Ignoring the market may mean an unrealistic price is generated.

Question 12

When is cost-plus appropriate

Answer 12

When the firm is a market leader with little need to

worry about competition.

Question 13

Predatory pricing

Answer 13

A strategy that sets price low enough to force a competitor out of business
- often only on a local basis where competitors are smaller, local firms.

Question 14

Predatory benefit

Answer 14

Once a rival has been forced to close, prices can be pushed up
higher, increasing margins.

Question 15

Predatory pricing drawback

Answer 15

If it can be proven to be specifically designed only to drive
rivals out of business, predatory pricing is illegal.

Question 16

Competitive pricing

Answer 16

A competitive pricing strategy means charging a price at the market
average or at a discount to the average price in the market.

Question 17

Benefit of competitive pricing

Answer 17

This should ensure that price will not put customers off

buying the product.

Question 18

Drawback of competitive pricing

Answer 18

Firms that use a competitive pricing strategy have little

control over the price they charge and thus the revenue they generate.

Question 19

Psychological pricing

Answer 19

Less of a strategy and more of a tactic used to make fine-tuned decisions
on the price to charge, prices are set just below major psychological levels,
such as £9.99 instead of £10, or (9,995 instead of €10,000.

Question 20

Psychological benefit

Answer 20

This can help nudge customers into making a purchase by

helping them to believe they are not quite spending £10 or £10,000.

Question 21

Psychological drawback

Answer 21

It may have little effect on many planned purchases and

may in fact mildly annoy consumers.

Question 22

Factors that determine the most appropriate

pricing strategy

Answer 22

Level of product differentiation, PED, level of competition, strength of brand, stage in product life cycle, Costs and the need to make a profit

Question 23

Level of product differentiation

Answer 23

Highly differentiated products will
have more control over pricing, potentially allowing them to use cost-
plus pricing.

Question 24

PED

Answer 24

Inelastic demand means that firms can
adjust prices however they wish without seeing major impacts on
demand, whereas a producer of a price elastic product is pushed into a
competitive pricing strategy.

Question 25

Level of competition

Answer 25

The higher the level of competition, the less

scope a firm has for moving away from a purely competitive strategy.

Question 26

Strength of brand

Answer 26

Strong brands differentiate products, reducing their price elasticity. This all adds up to the ability to take control over their own pricing, probably allowing a cost-plus approach.

Question 27

Stage in the product life cycle

Answer 27

During the introduction phase there’s
a key decision to make - penetration or skimming; pricing will often
change as the product moves through growth and into maturity.

Question 28

Costs and the need to make a profit:

Answer 28

Pricing below unit costs will lead
to loss-making, which is unsustainable in the long term. However, a
balance must be struck between pushing price above costs to maximise profit and ensuring that the price is relatively competitive.

Question 29

Changes in pricing to reflect social trends, online sales

Answer 29

pricing online may be more sensitive than on the high
street because online consumers find it easier to compare prices than
those trudging around different stores. Pricing levels may be lower as
running an online business generates lower fixed costs than bricks and
mortar’ stores that have rents to cover in prime locations.

Question 30

Changes in pricing to reflect social trends, price comparison sites:

Answer 30

Price comparison sites appear to encourage firms to price competitively
so their products and services show up as best value on these sites. In
fact, though, many of these sites are simply sales outlets for producers;
consumers should beware of assuming they are being told about the
best deals available.