4.5 The four Ps (price)

Question 1

Cost-plus pricing / mark-up pricing

Answer 1

Cost-plus pricing (or mark-up pricing) involves adding a percentage or predetermined amount of profit to the cost per unit of output to determine the selling price.

Question 2

Loss leader pricing

Answer 2

Lossleader pricing involves settingthe priceofa productbelow its costs of production. The purpose is to entice customers to buy other products with high profit margins in addition to purchasingthe lossleader product.

Question 3

Penetration pricing

Answer 3

Penetration pricing involves setting low prices to gain entry into a new market. Once the product has established market share, prices can be raised.

Question 4

Predatory pricing

Answer 4

Predatory pricing involves temporarily setting prices so low that rivals, especially smaller firms, cannot compete at a profitablelevel.

Question 5

Price

Answer 5

Price refers to the amount paid by a customer to purchase a good or service.

Question 6

Price discrimination

Answer 6

Price discrimination involves charging different prices to different groups of customers for the same product, e.g. adult and child airline tickets.

Question 7

Price leadership

Answer 7

Price leadership is used for best-selling products or brands in a particular market. Customers perceive there to be few substitutes for such products so the dominant firm can set its own prices. Competitors set their prices based on the price of the market (or price) leader.

Question 8

Price skimming

Answer 8

Price skimming involves initially charging high prices for innovative or high-tech products. Price is reduced as the noveltywears offand as substitute products appear.

Question 9

Price wars

Answer 9

Price wars involvebusinessescompeting bya series ofintensive price cuts to threaten the competitiveness of rival firms.

Question 10

Psychological pricing

Answer 10

Psychological pricing involves rounding down numbers such as $9.90 or $14 995 to make prices seem lower (than $10.00 or $15 000).