1.3.3 - pricing strategies

Question 1

what pricing strategies could you use for new products? briefly explain each one

Answer 1

• price skimming - launching a new product at a high price while the product is unique
• penetration - launching a new product at a very low price to entice customers to try it

Question 2

advantages and disadvantages of price skimming

Answer 2

• advantages - high price could help the product seem more desirable, early adopters will pay the high price in return for exclusivity, high prices generate rapid profits
• disadvantages - may deter some customers, early buyers may be frustrated as the price starts to fall, brand image may suffer when price begins to fall

Question 3

advantages and disadvantages of price penetration

Answer 3

• advantages - encourages lower risk product sampling, boosts sales volumes, high volumes may persuade retailers to buy the product, encourages customers to develop the habit of buying the product
• disadvantages - may immediately develop a ‘cheap’ image, upmarket retailers may be unwilling to stock the product, likely to increase PED

Question 4

which pricing strategies could you use for existing products? briefly explain each one

Answer 4

• cost plus - deciding on a price by adding a desired percentage onto total costs per unit
• predatory - setting the price low enough to force a competitor out of business
• competitive - charging a price at the market average
• psychological - prices are set just below major psychological levels

Question 5

advantages and disadvantages of cost-plus pricing

Answer 5

• advantage - this should guarantee a profit is made on each unit sold
• disadvantage - ignoring the market may mean an unrealistic price is generated

Question 6

advantages and disadvantages of predatory pricing

Answer 6

• advantage - once a rival has been forced to close prices can be pushed up higher, increases margins
• disadvantage - if it can be proven to be specifically designed only to drive rivals out of business, it is illegal

Question 7

advantages and disadvantages of competitive pricing

Answer 7

• advantage - this should ensure that price will not put customers off buying the product
• disadvantages - firms that use a competitive pricing strategy have little control over the price they charge and thus the revenue they generate

Question 8

advantages and disadvantages of psychological pricing

Answer 8

• advantage - this can help nudge customers into making a purchase by helping them to believe they are not quite spending £10 or £10,000
• disadvantage - it may have little effect on many planned purchases and may in fact mildly annoy consumers

Question 9

factors that determine the most appropriate pricing strategy

Answer 9

• level of product differentiation
• PED
• level of competition
• strength of the brand
• stage in the product life cycle
• costs and the need to make a profit

Question 10

changes in pricing to reflect social trends

Answer 10

• online sales
• price comparison sites