1.3.3. Pricing Strategies

Question 1

Why do companies use pricing strategies?

Answer 1

To evaluate business decisions based on the market and any possible financial consequences that may arise.

Question 2

What is price skimming?

Answer 2

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.

Question 3

What is the risk of price skimming?

Answer 3

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.

Question 4

What is price penetration?

Answer 4

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.

Question 5

What is the risk of price penetration?

Answer 5

If other businesses decide to do the same, which can lead to a price war.

Question 6

Price skimming or penetration when: the price of a product is inelastic?

Answer 6

Price skimming

Question 7

Price skimming or penetration when: product life cycle is long?

Answer 7

Price penetration

Question 8

Price skimming or penetration when: PED is unknown

Answer 8

Price skimming - it is better to be safe with a high price on introduction

Question 9

Price skimming or penetration when: barriers to entry are high

Answer 9

Price skimming

Question 10

Price skimming or penetration when: business is able to produce its product in high volumes

Answer 10

Price penetration - it can save money in the long term

Question 11

Price skimming or penetration when: quickly recoup costs of R&D

Answer 11

Price skimming

Question 12

Price skimming or penetration when: barriers to entry are low

Answer 12

Price penetration

Question 13

Price skimming or penetration when: recoup costs of R&D over a long period

Answer 13

Price penetration

Question 14

Price skimming or penetration when: product life cycle is short?

Answer 14

Price skimming

Question 15

Price skimming or penetration when: price is very elastic in the short term?

Answer 15

Price penetration

Question 16

What is price leadership? (long explanation)

Answer 16

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.

Question 17

The businesses that follow the price leader’s set price are called what?

Answer 17

Price takers

Question 18

What is price discrimination?

Answer 18

Charging different prices for different sections of the same market e.g. cinema

Question 19

When can price leadership turn into collusion?

Answer 19

If the market price of a product/service increases without operating costs needing to rise.

Question 20

What does cost-plus pricing determine?

Answer 20

How much a business should charge for their product/service.

Question 21

Calculation for cost-plus pricing?

Answer 21

total budgeted cost + markup/

budgeted sales in units

Question 22

What are price tactics?

Answer 22

The short-term price manipulations that companies use on a day-to-day basis to gain market advantage over their rivals.

Question 23

Examples of price tactics?

Answer 23

• discounts
• special promotions
• loss leaders
• psychological pricing
• predatory pricing

Question 24

Why are discounts used and what are some example?

Answer 24

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.

Question 25

Why would a company offer special promotions? E.g.?

Answer 25

If sales decline for one of its established products. E.g. Coca-Cola offering 8 cans instead of 6.

Question 26

What is a ‘loss leader’?

Answer 26

Selling a product at an artificially low price in order to encourage consumers to see what else is on offer.

Question 27

Example of psychological pricing?

Answer 27

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

Question 28

What is predatory pricing?

Answer 28

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.

Question 29

What factors influence pricing strategies?

Answer 29

• competitors
• costs
• demand
• pricing objective
• target audience
• product life cycle
• marketing mix

Question 30

What are 2 social trends that are reflected in changes in pricing?

Answer 30

• online sales

- price comparison sites

Question 31

How do online sales reflect changes in pricing?

Answer 31

Products sold online can be much cheaper since producers do not need a physical location to sell from.

Question 32

How do price comparison sites affect changes in pricing?

Answer 32

Now, you can go online, choose your price range and instantly find a list of packages that meet your needs.