23. Pricing Flashcards
What is Price
The amount paid by the customer
What factors must a business consider when setting a price?
Market conditions Production costs Taxes and subsidies Business objectives Market structure
What is full cost pricing
Calculate the cost of production then add a fixed profit margin
What is the advantage of full cost pricing
Price will cover costs
What are the disadvantages of full-cost pricing
Not flexible
Does not take into account market conditions
What is contribution pricing
Calculate the variable costs of production and set a price based on it
What are the advantages of contribution pricing
Flexible
What are the disadvantages of contribution pricing
Constantly fluctuating prices may annoy customers
Might not cover all fixed costs
What is competitor pricing
Calculate the price based on that of your rival’s
Advantages of competitor pricing
Rivals cannot undercut you
Disadvantages of competitor pricing
Prices may not cover costs
Penetration pricing
setting a low price to enter the market
advantage of penetration pricing
take out rival brands due to low price
disadvantages of penetration pricing
Not sustainable and once you raise your price customers may leave
Price skimming
setting a high price to enter the market
advantages of price skimming
reputation for high-quality product
high levels of revenue
disadvantages of price skimming
demand is reduced
a lowered price may create the feeling of a decrease in quality
psychological pricing
setting a price that evokes an emotional response in a customer
advantages of psychological pricing
make high levels of revenue without reducing the price too much
destructive pricing
cutting prices significantly to destroy new competition
advantages of destructive pricing
gain high sales and possible customer loyalty
disadvantages of destructive pricing
demand may reduce once the price goes back up
