1.3.3. Pricing Strategies Flashcards
Why do companies use pricing strategies?
To evaluate business decisions based on the market and any possible financial consequences that may arise.
What is price skimming?
Charging a higher price on release of a product or when it is in the growth stage of the product life cycle. This technique is used to make back a significant portion of the funds that lead up to a product’s launch, e.g. R&D.
What is the risk of price skimming?
If one company releases a product at a high price at the same time that another new product enters the market at a similar price/lower, there could be a loss in potential sales.
What is price penetration?
When a company charges an artificially low price for their product/service, sometimes used on the launch of a new product as a way to grab consumer interest and quickly gain market share.
What is the risk of price penetration?
If other businesses decide to do the same, which can lead to a price war.
Price skimming or penetration when: the price of a product is inelastic?
Price skimming
Price skimming or penetration when: product life cycle is long?
Price penetration
Price skimming or penetration when: PED is unknown
Price skimming - it is better to be safe with a high price on introduction
Price skimming or penetration when: barriers to entry are high
Price skimming
Price skimming or penetration when: business is able to produce its product in high volumes
Price penetration - it can save money in the long term
Price skimming or penetration when: quickly recoup costs of R&D
Price skimming
Price skimming or penetration when: barriers to entry are low
Price penetration
Price skimming or penetration when: recoup costs of R&D over a long period
Price penetration
Price skimming or penetration when: product life cycle is short?
Price skimming
Price skimming or penetration when: price is very elastic in the short term?
Price penetration
What is price leadership? (long explanation)
One company (the price leader) will set the price for a product/service and all other businesses will follow. The price leader is generally a well-established company that controls the largest market share due to selling high quality products/services. Setting the going rate demonstrates their dominance and premium status, and helps retain brand loyalty and lower PED.
The businesses that follow the price leader’s set price are called what?
Price takers
What is price discrimination?
Charging different prices for different sections of the same market e.g. cinema
When can price leadership turn into collusion?
If the market price of a product/service increases without operating costs needing to rise.
What does cost-plus pricing determine?
How much a business should charge for their product/service.
Calculation for cost-plus pricing?
total budgeted cost + markup/
budgeted sales in units
What are price tactics?
The short-term price manipulations that companies use on a day-to-day basis to gain market advantage over their rivals.
Examples of price tactics?
- discounts
- special promotions
- loss leaders
- psychological pricing
- predatory pricing
Why are discounts used and what are some example?
They are used for a short time as a way to stimulate demand. E.g. two-for-one offers and buy-now-pay-less schemes.
Why would a company offer special promotions? E.g.?
If sales decline for one of its established products. E.g. Coca-Cola offering 8 cans instead of 6.
What is a ‘loss leader’?
Selling a product at an artificially low price in order to encourage consumers to see what else is on offer.
Example of psychological pricing?
Charging £9.99 instead of £10.00. It is an emotional tactic that plays on the fact that £10 is not as much of a bargain as £9.99
What is predatory pricing?
When a business sets a price so low that it threatens to destroy all competition and raises the market’s barriers to entry. It should only be done in the short term and by a business that can afford to make such losses.
What factors influence pricing strategies?
- competitors
- costs
- demand
- pricing objective
- target audience
- product life cycle
- marketing mix
What are 2 social trends that are reflected in changes in pricing?
- online sales
- price comparison sites
How do online sales reflect changes in pricing?
Products sold online can be much cheaper since producers do not need a physical location to sell from.
How do price comparison sites affect changes in pricing?
Now, you can go online, choose your price range and instantly find a list of packages that meet your needs.
