1.3.3 Pricing Strategies

Question 1

what is cost plus pricing

Answer 1

• the business calculates the cost of production and then adds a markup to determine the final price
• the markup covers the cost of production plus the businesses desired profit margin
  unit cost + (mark up percentage x unit cost)
• commonly used by manufacturers that produce standardised goods

Question 2

price skimming

Answer 2

• the business sets a high price for a new product/service when it is first introduced to the market
• this is effective when an established brand is introducing a new product and there is a high demand for it e.g. successive models of Apple’s macbook air
• the high price helps the business recover its development and marketing costs quickly
• the business will then gradually lower the price to ensure sales continue

Question 3

penetration pricing

Answer 3

• the business sets a low price for a new product/service when it is first introduced
• this is effective when a business wants to quickly capture market share and attract price-sensitive customers e.g. many new perfumes launch using penetration pricing
• once they have enough customers, the business will start to raise the price

Question 4

predatory

Answer 4

• the business sets prices so low that it drives its competitors out of the market
• this strategy is illegal in many countries as it is considered anti-competitive and harms customers by reducing choice in the market

Question 5

competitive pricing

Answer 5

• the business sets its prices based on its competitors prices
• this is effective when a business is in a highly competitive market and wants to maintain its market share
• the business must continually monitor its competitors prices and adjust its prices accordingly to remain competitive

Question 6

psychological pricing

Answer 6

• this pricing strategy takes into account the customers emotions, beliefs, and attitudes towards the product/service

Question 7

factors influencing the choice of pricing strategy

Answer 7

• number of USPs/ amount of differentiation
• price elasticity of demand
• level of competition
• strength of the brand
• stage in the product life cycle
• costs and the need to make a profit

Question 8

changes in pricing to account for social trends: online sales

Answer 8

• dynamic pricing:
• retailers can adjust prices in real-time based on factors such as demand and competition
• prices are higher when supply is lower and vice versa

Question 9

changes in pricing to account for social trends: price comparison sites

Answer 9

• retailers have had to adjust their pricing strategies to remain competitive in an online marketplace
• the use of price-matching policies:
• retailers now offer to match the prices pf their competitors to prevent customers from switching to a competitor with a lower price
• retailers may also use pricing algorithms to monitor the prices of their competitors and adjust their prices automatically