32: Using the marketing mix: pricing

Question 1

Pricing strategies

Answer 1

Long-term pricing plans which take into account the objectives of the business and the value associated with the product.

Question 2

Price skimming

Answer 2

Entering a market with a high price to attract early adopters and recoup high development costs.

Question 3

Penetration pricing

Answer 3

Below market pricing to gain a foothold in an established and competitive market.

Question 4

Price leader

Answer 4

A product that has significant market share and can influence the market price.

Question 5

Price taker

Answer 5

A firm which sets its prices at the same or similar level to those of the dominant firm in the industry.

Question 6

Pricing tactics

Answer 6

The manipulation of price to achieve a specific short-term objective.

Question 7

Loss leaders

Answer 7

Products sold at less than cost to attract customers to a product range.
Once the consumer is ‘captured’ they are likely to buy other products in the firm’s range, therefore increasing the total value of sales.

Question 8

Psychological pricing

Answer 8

The use of odd number pricing to increase the value-for-money appeal of a product. e.g. £5.99 rather than £6.

Question 9

Price elasticity of demand

Answer 9

The responsiveness of demand for a product to change in its price.

= % change in demand / % change in price.

Question 10

What determines a products price elasticity of demand?

Answer 10

• The number of similar products available to consumers. If there are lots of competing products PED is likely to be elastic because a rise or fall in price will cause customers to switch from one supplier to another.
• How essential is the product? This will also effect consumers reactions to changes in price. If the product is a necessity, or very addictive, customers will continue to buy the same quantity even though the price changes. This suggests that essential and very addictive products are price inelastic.
• The price of the product in relation to the total income of the consumer.
• Time. In the short term consumers are often loyal to their chosen brand and won’t change their buying habits even if the price changes. This makes products more price inelastic in the short term. In the longer term they may look at alternatives, particularly if satisfaction in the brand decreases, making demand more price elastic.
• Brand or product? The demand for petrol is likely to be price inelastic due to the essential nature of the product. However, demand for any one brand of petrol could be elastic if only one company, e.g. Shell, increased their prices. Car owners would switch to Esso and others.
  However, brand loyalty can be strong. E.g. Price changes in jimmy chop shoes, sales might not be effected = inelastic.

Question 11

Price inelastic demand

Answer 11

The demand for a product changes relatively less than the change in price.

Question 12

Price elastic demand

Answer 12

The demand for a product changes relatively more than the change in price.