Chapter 11- Pricing Strategies

Question 1

Pricing strategy

Answer 1

A set of plans about pricing which help a business to achieve its marketing and corporate objectives.

For example, a corporate objecting might be to double in size over the next five years.

A marketing objective to achieve this might be to take the products of the business ‘up market’

Question 2

Cost Plus Pricing

Answer 2

Adding a percentage to the costs. E.g. 25% on top of a 80 pounds making cost so 100 pounds - Common in retailers

Pros-
• You always make your money back

Cons-
• It ignores market conditions, e.g. other businesses may be charging
much higher or lower
• It’s very difficult to identify the costs associated with each product,
e.g. lighting etc.

Question 3

Mark Up

Answer 3

The percentage added to the unit cost that makes the profit

Question 4

Penetration Pricing

Answer 4

Products are launched at a low price in order to offer customers an incentive to switch from their usual brand, but the price is increased over time as the product develops a stronger brand name.

Pros-
•	It gives high growth
•	Fast growth in sales may allow business to lower production costs by 
        exploiting economies of scale
•	Puts pressure on rivals

Cons-
• If a business uses it for too long then customers may be accustomed
to it then wont buy it after

Question 5

Predatory Pricing

Answer 5

Setting a low-price forcing rivals out, normally below cost price. Its aim is to eliminate competitors from the market.

Some forms are illegal in the UK and the EU as it can lead to a lack of competition in the market in the long term which leads to high prices. E.g. Esso and Shell were accused of localised predatory pricing whereby franchised dealers had to buy their branded fuel at wholesale prices higher than retail prices on sites owned and operated by the same oil company

Question 6

Competitive Pricing

Answer 6

Pricing strategy based on rivals’ prices, often used by businesses in a fiercely competitive market.

For example, one approach is to charge the same price as competitors – the advantage of this is a price war is likely to be avoided.

Another option Is to be a market leader and set the price while other follow – strong branding are usually the cause of these brands to be able to become price leaders.

Question 7

Product Life Cycle

Answer 7

Shows the different stages in the life of a product and the sales that can be expected

Question 8

Price Skimming

Answer 8

Setting high price initially then setting low price later. Common in technical products.

Aim of this is to generate high levels of revenue before the competitors arrive, and exploit the popularity of a new product while it is unique

Pros-
• You get large revenue as people are willing to pay that price as the
product has no rivals and is still unique

Cons-
• Skiming can only be used if demand is price inelastic
• It attracts competitors to the market

Question 9

Psychological pricing

Answer 9

Prices are set marginally blow a round number such as £19.99, to give the illusion the product Is better value.

Question 10

Price discrimination

Answer 10

Reductions are offered to certain market segments, such as children’s over-65s, to encourage their customs.

Question 11

What 5 factors influences price strategies?

Answer 11

1. Degree of competition
2. Production costs
3. Product positioning in the
   market
4. Lifecycle
5. Price elasticity

Question 12

Degree of competition

Answer 12

In markets with high competition, price is an important means of competing. Unless the firm has a dominant market, share and is the market leader, managers may be forced to use a competitive pricing strategy in order to attract customers.

Question 13

Production costs

Answer 13

In order to generate profits, the price of the product must be greater than the unit cost of producing the product.

Question 14

Products positioning in the market.

Answer 14

Undifferentiated and non-branded products can offer better value than branded alternatives through low price strategies. If a firms product are differentiated for higher value and a stronger brand name, a higher price can be commanded.

However, this is limited and Investment in promotion to maintain a strong brand name is subsequently important.

Question 15

Lifecycle

Answer 15

A product may be priced differently in the growth stage of the cycle than when it enters the decline stage. Managers will use the product life cycle to adjust prices

Question 16

Price elasticity

Answer 16

Price inelastic products generate greater revenue when prices are increased, because the percentage that sales fall by is lower than the percentage prices increase by.

Price elastic products benefit better from price reductions as the percentage that managers reduce prices by will be less than the percentage that sales rise by when prices are cut.

Question 17

What is the most significant determinant of price?

Answer 17

Prices of competitors. Businesses with smaller market shares use the prices of competitors as a reference point and are likely to change their prices in accordance with market leaders

Market position – firms with a more dominant market position that operate in markets with fewer competitors may find the strength of their band name is a key determinant of price, regardless of the prices rival goods sell for.

Question 18

Should a business cut its prices?

Answer 18

Depends on the price elasticity of the product. If the product is price inelastic, then price reductions would not be advisable. However, for a price elastic product, price reductions would increase the total revenue generated, even though revenue per sale is less.

The economy – during periods of recession , even some branded goods may consider price reductions in order to prevent a loss of market share to more price competitive rivals.