9. Pricing

Question 1

What are the two main considerations for setting prices?

Answer 1

A price the customer will pay that is also profitable for the long term

Question 2

What are the 3 main pricing strategies?

Answer 2

1. Market driven optimum pricing
2. Cost based approaches
3. Specific strategies - e.g skimming, penetration pricing

Question 3

What is a market in perfect competition?

Answer 3

A business can sell as many items as it wishes at the prevailing market price but cannot influence the price

Question 4

What is a market in imperfect competition?

Answer 4

In order to sell more items, the price has to be lowered

Question 5

What are the 3 steps of the mathematical approach to finding the profit maximizing position on a downward sloping demand function?

Answer 5

1. Identify the equation for the price demand relationship
2. Identify the marginal revenue and marginal cost functions
3. Solve for MR = MC to find the price/quantity mix that maximizes profit

Question 6

What is the exact point in terms of MR and MC at which profit is maximised?

Answer 6

Where Marginal Revenue = Marginal Cost

Question 7

What is the equation for the price demand line?

Answer 7

P = a - bX

Question 8

What is the equation for marginal revenue at a set quantity?

Answer 8

MR = a - 2bX

Question 9

If you are trying to maximise revenue rather than profit, what point do we need to operate at in terms of marginal revenue?

Answer 9

MR = a - 2bX = ZERO

Question 10

What is the equation for price elasticity of demand?

Answer 10

% Change in Qty / % Change in Price

Question 11

What does it mean if PED is > 1?

Answer 11

Demand is elastic, price sensitive - a change in price leads to a bigger change in quantity, a drop in price will increase revenue

Question 12

What does it mean if PED is < 1?

Answer 12

Demand is inelastic, price insensitive - a change in price leads to a smaller change in quantity, a rise in price will increase revenue

Question 13

What 3 things impact price sensitivity?

Answer 13

1. Number of competitors and similarity of their products
2. How much of a consumers disposable income it takes up
3. Product considered luxury or necessity

Question 14

What is the main reason for using marginal cost for pricing?

Answer 14

Useful as a minimum price where there is SPARE capacity

Question 15

What is the main issue with marginal costing?

Answer 15

Ignores fixed costs which need to be covered in the long term

Question 16

What is the main reason for using relevant cost in pricing?

Answer 16

Includes opportunity costs and so is good to set minimum price where there are scarce resources

Question 17

What are the 2 main benefits of absorption/ABC costing in pricing situations?

Answer 17

1. Guarantee all costs are covered in the short and long term, as long as budgeted demand is achieved
2. Quick and cheap method of setting prices

Question 18

What is the 2 main issues with absorption costing?

Answer 18

1. Need to ensure consumers are happy paying the price

2. Need OAR method to be fair

Question 19

What are the 2 main benefits of standard costing in pricing situations?

Answer 19

1. Allows a set selling price that is kept stable

2. Any internal inefficiency is borne by the business rather than the customer

Question 20

What 4 reasons might a business have to adapt their pricing policy for?

Answer 20

1. Stage of product lifecycle
2. Entry of competitors
3. Different geographical demands
4. Changes in technology

Question 21

What is market skimming?

Answer 21

Initially charging high prices to cover upfront costs, then lowering as prices become mature

Question 22

When is market skimming commonly used?

Answer 22

High tech products, that get updated quickly, that are perceived as desirable and unique

Question 23

What is premium pricing?

Answer 23

Products marketed as higher quality to support a permanent high price strategy, with high quality support services

Question 24

What is penetration pricing?

Answer 24

Low initial price set to gain high volumes and market share, creating a barrier to entry for other possible entrants

Question 25

What is loss leading pricing?

Answer 25

Products sold at very low prices with the intention that customers will buy other products to go with them (e.g. games consoles and their games)

Question 26

What is product bundling?

Answer 26

Selling a combination of products together in a package at a price that is lower than the sum of each individual component - high revenue, low margin but decent profits

Question 27

What is product differentiation (price discrimination)?

Answer 27

Different price charged to a different segment due to different price/demand relationships

Question 28

What are the 4 key examples of price discrimination?

Answer 28

1. Time of day
2. Age of consumer
3. Geographical market
4. Type of consumer

Question 29

What are the two issues in price discrimination that need controls in place to stop?

Answer 29

1. Consumers transferring to other segments

2. Exploiting the differences in markets (e.g. posing as another age)