1.3.3 Pricing Strategies

Question 1

Pricing strategy

Answer 1

The approach which a business decides on for setting the price of its products or services.

Question 2

Cost plus pricing

Answer 2

Involves adding a certain percentage to the average total cost of producing the product.

Question 3

Benefits and drawbacks of cost plus pricing

Answer 3

+ Guaranteed to make a profit.

• Doesn’t consider external environment.

Question 4

Price skimming

Answer 4

Charging a very high initial price for the product.

Question 5

Benefits and drawbacks of price skimming

Answer 5

+ Initial high prices to help recover R&D costs.

• Customers may be put off by high price.

Question 6

Competitive pricing

Answer 6

Charging about the same as, a little less than, the prices of competing products.

Question 7

Benefits and drawbacks of competitive pricing

Answer 7

+ Reduction in price can lead to a sales uplift and increased numbers of customers.

• Competitors could price themselves lower.

Question 8

Penetration pricing

Answer 8

Used to enter a new market. A lower price than competition is set, to try and persuade customers of existing products to give the new product a try, in an attempt to gain market share.

Question 9

Benefits and drawbacks of penetration pricing

Answer 9

+ Quick gain in market share.

• Low profits.
• Can impact perceived quality/brand reputation.
• Competitors may reduce prices making to justify increasing yours.

Question 10

Psychological pricing

Answer 10

Used to make the price seem more attractive than it actually is by rounding it down.

Question 11

Benefits and drawbacks of psychological pricing

Answer 11

+ Increased sales.

• Reduction in profit margin due to psychologically gain.
• Doesn’t guarantee customers will purchase.

Question 12

Predatory pricing

Answer 12

Prices are set at a very low level, even below the costs of production to drive competitors and new entrants out of the market.

Question 13

Benefits and drawbacks of predatory pricing

Answer 13

+ Drive competitors out the market.

• Illegal.
• Short term loss.

Question 14

Factors influencing a firms pricing strategy

Answer 14

• Number of USP’s/amount of differentiation.
• Price elasticity of demand.
• Level of competition in the business environment.
• Strength of brand.
• Stage in product lifecycle.
• Costs and the need to make a profit.

Question 15

Changes in pricing to reflect social trends

Answer 15

1. Online sales.
2. Price comparison sites.

Question 16

Online sales

Answer 16

Dynamic pricing, retailers can adjust pricing in real-time based on factors such and demand and competition. Retailers may also offer different prices for online purchase compared to instore purchase to incentive customers to shop online so that they require fewer physical stores.

Question 17

Price comparison sites

Answer 17

Price matching policies. Pricing algorithms to monitor prices of competitors and adjust them accordingly.