1.52 Price

Question 1

What is elasticity of demand

Answer 1

-The measurement of change in demand for a product in response to changes in price
-if a price elasticity is more than 1, it is more sensitive to change
-if less than 1, less sensitive to change

Question 2

What are the advantages of cost plus pricing

Answer 2

-Simple to calculate- easy to determine using a known cost and adding a fixed profit margin %
-covers all costs- ensures production costs are covered- reduced risk of loss
-reduced price wars- less likely to undercut competitors as prices are not based on competitors

Question 3

What are the disadvantages of cost plus pricing

Answer 3

-ignores market demand- doesn’t consider what the customer is willing to pay
-unsuitable in competitive pricing- competitors with lower costs may charge better prices
-business has no way of knowing if the potential customer will pay the calculated price

Question 4

What are the advantages of contribution pricing

Answer 4

-covers variable costs- ensures each unit covers variable costs before fixed costs
-simple to apply- easy to calculate and understand- Selling price minus variable costs
-flexible pricing- businesses can temporarily lower prices, as long as contribution is positive

Question 5

What are the disadvantages of Contribution pricing

Answer 5

-ignores fixed costs- doesn’t consider fixed overheads- may cause underpricing in the future
-not suitable to all markets- eg markets with strict pricing expectations of if the brand image is important
-assumes variable costs- in reality these may vary, meaning calculations will be unreliable

Question 6

What are the advantages of perceived pricing

Answer 6

-if customers perceive the product as high value, companies can charge premium prices
-Designers and manufacturers are motivated to enhance product design and branding to increase perceived value
-strong perceived lead to brand loyalty, repeat purchases and positive word of mouth