4.5 PRICE Flashcards
DEFINE PRICE
the amount charged to the customer. It must reflect production costs, market conditions, customer value, & business objectives
Define cost plus
pricing method where the total cost of producing is calculated (including variable and fixed costs).
Then a profit margin per unit (mark-up) is added to obtain the selling price.
Evaluate cost-plus
✅ easy to calculate
✅ ensures profit
❌ ignores markets needs
❌ pricing approach of competitors is ignored
❌ when high cost of raw materials = very high price costumer may not be willing to pay
Define penetration
setting low price to product when 1st introduced, then when enough costumers, ⬆️ price
Used to quickly get market share + attract price sensitive costumers
Evaluate penetration
✅ high sales volume + market share
✅ competitors unable to beat low price may = competitions out of market = ⬇️ competition
❌ costumers may perceive product is low quality
❌ limits profit made
❌ difficult to raise price later
Define loss leader
charging price below cost of production
To attract customer to buy other profitable products to make up fro loss of low-priced products
⬆️ overall sales volume + build customer loyalty
Evaluate loss leader
✅ attracts costumers to switch brands
✅ higher sales volume
❌ may damage perceived value
❌ risk of financial loss if no other purchases made
Define predatory (destroyer prices)
firm sets prices very low, even bellow cost of production —> to drive competitors out of the market or harm their sales. Goal = establish dominant market position by enforcing rivals to exit market
(When competition eliminated may then ⬆️ prices to ⬆️ profitability)
Evaluate predatory pricing
✅ gain dominant position in the market
✅ can eliminate weaker rivals
❌ negative impact in businesses reputation
❌ expensive
Define premium pricing
Firm charges significantly higher prices than competitor products
Gives impression of prestige / quality / exclusivity
(Aims to attract customers that associate high price w/ superior quality)
Evaluate premium pricing
✅ improves value of brand + exclusivity
✅ differentiation
✅ high profit margins
❌ price-conscious costumers ignored = Lower sales volume
❌ require high quality raw materials + components, = high production costs
Define dynamic pricing strategy
changing prices to match demand patters
aims to maximise revenue whilst making full use of capacity
Prices raised if demand is high, lowered when low
Define competitive pricing strategy
= prices based on competitors’ pricing rather than solely on production costs / perceived value
= matching or undercutting (⬇️) the prices charged by competitors to ⬆️ sales
(help businesses maintain competitive)
Evaluate dynamic pricing strategy
✅ maximises revenue
✅ optimal use of resources (hotels can maximise room occupancy by adjusting based on demand)
✅ consumer behaviour insights (analysis on how consumers respond to price changes = inform future
pricing strategies + marketing tactics)
❌ costumer dissatisfaction = ⬇️ trust + loyalty
❌ require sophisticated algorithms + tech = small businesses may lack finance
❌ ethical concerns - may harm businesses reputation
Evaluate competitive pricing strategy
✅ helps gain market share in price-sensitive markets
✅ flexibility = avoids losing market share whilst waiting for the pricing strategy to be changed, just change
it according to competitors
❌ lower profit margins if prices constantly pushed down to beat/match competitors
❌ no differentiation (if products perceived as similar = consumers purchasing decisions based solely on price)
❌ race to the bottom: prices may constantly drop regardless of actual value of product = limits
Businesses ability to set prices based on costs or USPs
Define contribution pricing
sets price above direct costs to cover indirect costs & generate profit
Ensures all units sold contribute to covering indirect costs + provide profit
Evaluate contribution pricing
Ensures no loss is made
Requires indirect costs to be allocated
Caution for price to still be competitive and meet market expectations
Ignores issues like spoilage or excess inventory
Define PED
-PED measures responsiveness of the quantity demanded of a product due to a change in its price
-Calculated by % change in quantity demanded / % change in price
-A higher PED = demand ⬆️ sensitive to price
-A lower PED = demand less responsive
What does it mean to b price elastic and price inelastic
Responsiveness of demand to a change in price determines if product is price elastic or inelastic
Price elastic = when quantity demanded changes more than change price = should avoid raising prices of these products
Price inelastic = quantity demanded changes less than the change in price = business should avoid cutting price of these products
What different PED values mean
PED > 1 Elastic Demand
Quantity demanded changes more than price
Customers are sensitive to price changes
PED between 0 & 1 Inelastic Demand
Quantity demanded changes less than price
Customers are less sensitive to price changes”
PED & PRICING strategies
Elastic demand (PED > 1):
lowering price —> large ⬆️ in quantity demanded —> higher revenue
Raising price —> large ⬇️ in demand —> lower revenue
Best strategy: competitive pricing or penetration pricing
In elastic demand (PED < 1):
raising price —> small ⬇️ in demand —> higher revenue
Lowering price —> small ⬆️ in demand —> lower revenue
Beat strategy: premium pricing
What goes in x and y axis ink PED graph
X: price
Y: quantity
5 factors affecting PED
Brand loyalty – Strong loyalty makes demand more inelastic.
Availability of substitutes – More substitutes = more elastic demand.
Proportion of income spent – Expensive goods = more elastic demand.
Necessity vs. luxury – Necessities = inelastic, luxuries = elastic.
Time period – Demand becomes more elastic over time as consumers find alternatives
