1.3.3 pricing strategies

Question 1

How many pricing strategies are there?

Answer 1

6 strategies

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

Question 2

What is cost plus pricing?

Answer 2

creates a profit when the business adds an amount onto the the production/ operation costs

Question 3

Advantages on cost plus

Answer 3

• easy to calculate .

• price can be justified when costs rise.

• manages can be confident each product is being sold for a profit .

Question 4

disadvantages for cost plus

Answer 4

• may not consider competition.

• the business has less incentive to control costs.

• ignores price elasticity if demand .

Question 5

What is price skimming?

Answer 5

It involves setting a high initial price and then lowering it over time.

Question 6

advantages of price skimming

Answer 6

• can help a business recover product development costs due to high i total price.

• high initial price can give customers the perception that the product is of high quality

Question 7

disadvantages of price skimming

Answer 7

• rarely lasts long as competitors launch similar products

• impacts initial sales volume

Question 8

what is penetration pricing?

Answer 8

invokes offering a low price and then price is increased over time

Question 9

advantages of penetration pricing

Answer 9

• sales volume should be hight which can help with cash flow and make distribution easier to obtain.

• low price acts as a barrier to entry to other potential competitors considering a similar strategy.

• can gain market share quickly.

• can build customer usage and loyalty

Question 10

what is predatory pricing?

Answer 10

prices set very low by a dominant competitor. Price might even be free or lead losses by the predator.

Question 11

advantages of predatory pricing

Answer 11

• create a barrier to entry.

• reduce competition as competitors are squeezed out of the market.

Question 12

disadvantages of predatory pricing

Answer 12

• illegal under competition law

• only useful in short term and not medium to long term

Question 13

what is competitive pricing?

Answer 13

involves setting prices based on what rivals/competitors are charging

Question 14

advantages of competitive pricing

Answer 14

• price will not be a competitive disadvantage

• allows a business to increase prices to be in line with the competition

Question 15

disadvantages of competing pricing

Answer 15

• customers may feel that the pricing strategy is manipulating them

• may not appeal to customers who make rational purchasing decisions.

Question 16

what is psychological pricing?

Answer 16

• designed to appeal to customers who use emotional rather than a rational response to pricing messages.

Question 17

advantages of psychological pricing

Answer 17

• can influence the way that customers view the product without changing the product.

• east strategy to implement

Question 18

disadvantages of psychological pricing

Answer 18

• customers may feel like the pricing strategy is manipulating them.

• may not appeal to customer who make rational purchasing decisions