3.3.2 Price Flashcards
What is price?
Price is the amount of money producers are willing to sell or consumer are willing to buy the product for.
What are examples of the different methods of pricing?
- market skimming
- Penetration pricing
- Competitive pricing
- Cost plus pricing
- Loss leader pricing/promotional pricing
What is market skimming?
Setting a high price for a new product that is unique or very different from other products on the market.
What are the advantages of market skimming?
- Profit earned is very high
- Helps recover/compensate research and development costs
What are the disadvantages of market skimming?
- It may backfire if competitors produce similar products at a lower price
What is penetration pricing?
Setting a very low price to attract customers to buy a new product
What are the advantages of penetration pricing?
- Attracts customers more quickly
- Can increase market share quickly
What are the disadvantages of penetration pricing?
- Low revenue due to lower prices
- Cannot recover development costs quickly
What is competitive pricing?
Setting a price similar to that of competitors’ products which are already available in the market
What are the advantages of competitive pricing?
- Business can compete on other matters such as service and quality
What are the disadvantages of competitive pricing?
- Still need to find ways of competing to attract sales.
What is cost plus pricing?
Setting price by adding a fixed amount to the cost of making the product
What are the advantages of cost plus pricing?
- Quick and easy to work out the price
- Makes sure that the price covers all of the costs
What are the disadvantages of cost plus pricing?
- Price might be set higher than competitors or more than customers are willing to pay, which reduces sales and profits
What is Loss leader pricing/ promotional pricing?
Setting the price of a few products at below cost to attract customers into the shop in the hope that they will buy other products as well
What are the advantages of loss leader pricing/promotional pricing?
- Helps to sell off unwanted stock before it becomes out of date
- A good way of increasing short term sales and market share
What are the disadvantages of loss leader pricing/promotional pricing?
- Revenue on each item is lower so profits may also be lower
What pricing method should you use form existing and new products?
If it’s new, then price skimming or penetration pricing will be most suitable. If it’s an existing product, competitive pricing or promotional pricing will be appropriate.
What pricing method should you for unique products?
If yes, then price skimming will be beneficial, otherwise competitive or promotional pricing.
What pricing method should you use if there is a lot of competition in the market?
If yes, competitive pricing will need to be used.
What pricing method should you use if the business has a well-known brand image?
If yes, price skimming will be highly successful.
What pricing method should you use if the business has high/low costs?
If there are high costs, costs plus pricing will be needed to cover the costs. If costs are low, market penetration and promotional pricing will be appropriate.
What pricing method should you use based on the marketing objectives?
If the business objective is to quickly gain a market share and customer base, then penetration pricing could be used. If the objective is to simply maintain sales, competitive pricing will be appropriate.
What is PED
The PED of a product refers to the responsiveness of the quantity demanded for it to changes in its price.
PED (of a product) = % change in quantity demanded / % change in price
