1.3.3 - Pricing Strategies

Question 1

What is 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 different types of pricing strategies

Answer 2

1. cost plus
2. price skimming
3. penetration
4. predatory
5. competitive
6. psychological

Question 3

What is 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
• Many Young Enterprise teams work out their projected profits by using cost-plus pricing

Question 4

What are the advantages of cost plus pricing

Answer 4

• Protects the profit margins of the business
• Easiest method of pricing to apply
• Easy to estimate profit levels

Question 5

What are the drawbacks of cost plus pricing

Answer 5

• This method of pricing does not take into account the prices of the competition

Question 6

What is skimming pricing

Answer 6

• 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 7

Advantage’s of skimming pricing

Answer 7

• A high starting price can establish an upmarket image
• For innovative products it can be a great way to harvest high profits from early buyers who want the latest gadget / item / product and are prepared to pay a premium

Question 8

disadvantage’s of skimming pricing

Answer 8

• Cheaper imitations of the product may appear on the market too soon and take sales away from the product
• Risky strategy as customers may be put off from buying due to the high price

Question 9

What is competitive pricing

Answer 9

• Some products or services are 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 10

Advantages of competitive pricing

Answer 10

• Useful in a market where one brand is dominant, the other brands would need to discount and offer lower prices encourage customers to buy

Question 11

disadvantages of competitive pricing

Answer 11

Pricing at the competitive rate may not cover all the costs of some smaller businesses which can’t get the same economies of scale as the larger ones

Question 12

What is penetration pricing

Answer 12

• 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)
• Mass market – repeat purchases e.g. tea bags, biscuits which are called Fast Moving Consumer Goods (FMCG).

Question 13

advantages of penetration pricing

Answer 13

• Works best with new products being launched to encourage consumers to try the product

Question 14

disadvantages of penetration prcing

Answer 14

• Consumers may have bought anyway, even without the low start price
• Expensive as it eats into profits by reducing sales revenue

Question 15

What is predatory pricing

Answer 15

• 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
• Depends on the strength of the brand, will consumers switch or stay loyal?
• Depends on the financial strength of the firm can they afford to cut prices?

Question 16

Advantages of predatory pricing

Answer 16

• The intention with predatory pricing is to drive competitors out of the market place or set a barrier to entry to discourage new entrants to the market

Question 17

disadvantages of predatory pricing

Answer 17

• Depends on the price elasticity of the product, if it is low then a lower price won’t make much difference to customer demand

Question 18

What is psychological pricing

Answer 18

• This means pricing a product at £1.99 rather than £2.00 to appear cheaper
• Some businesses consider pricing carefully as it is often an indicator of quality
• High value or status items like luxury cars avoid pricing just below but instead may price higher to match their customers’ expectations

Question 19

Advantages of psychological pricing

Answer 19

• Ideal for products which want to project a premium image – the price might be part of the appeal

Question 20

disadvantages of psychological pricing

Answer 20

• Psychological pricing strategy can be high risk, if comparable products are available for a lower price consumers could be tempted away

Question 21

What factors determine price strategy

Answer 21

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 22

What are number of USPs/ amount of differentiation in relation to price strategy

Answer 22

❑ A USP is a unique selling point, it is the unique details or features of the product that differentiates it from its rivals
❑ For example: In a chocolate bar it may be the % of cocoa, or extra ingredients
❑ In a washing machine it may be how quiet it is, or the load capacity or its eco settings

Question 23

What is elastic demand in relation to pricing strategy

Answer 23

• 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

Question 24

What is inelastic demand in relation to pricing strategy

Answer 24

• 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 25

What is Level of competition in the business environment in relation to pricing strategy

Answer 25

• 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
• Some stores offer a price match e.g. John Lewis “never knowingly undersold”

Question 26

What is strength of brand in relation to pricing strategy

Answer 26

• 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
• In 84%* of sales brand is the largest influence on price

Question 27

What is stage in product life in relation to pricing strategy

Answer 27

• 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

Question 28

what is Costs and the need to make a profit in relation to pricing strategy

Answer 28

• The costs of a product all need to be taken into account when its price is decided:
• Raw materials
• Promotion and advertising
• Product development and design
• A business will want to breakeven and make a profit, breakeven is the point where total costs equal total revenue

Question 29

How do online prices differentiate to physical shops

Answer 29

• Websites can offer low prices than the bricks and mortar shops because they don’t have the overheads, rent and costs of running a store.
• Many customers look at the goods in a store and then buy online at a cheaper price
• This means many online retailers need to have dynamic pricing which is constantly checking and updating based on competitors prices