chapter 13 Flashcards
what is cost plus pricing
total cost/output x %markup
advantages of cost plus pricing
1.quick and easy to workout price
2.ensures that price covers all cost
disadvantages of cost plus pricing
price may be set higher than competitors, this reduces sales and profits
what is price skimming
Setting a high price for a new product that is unique and has a novelty factor, since it offers a novelty factor the price is higher to cover the high costs of research and development
advantages of price skimming
1.Helps recover research and development costs
2.the high price may help in creating a quality image for the product
disadvantages of price skimming
may put off some potential customers because of the high price
what is penetration pricing
when price is set lower than competitor’s price to be able to enter a new market, once customer loyalty has been gained, price will increase to a similar level as the competitor
advantages of penetration pricing
1.attract customers quickly and help product become more established
2.increase market share quickly
disadvantages of penetration pricing
1.possible loss of revenue due to lower prices
2.cannot recover development costs quickly
what is competitive pricing
when the product is priced in line with or just below the competitor’s prices, this is done for already established products in the market
advantages of competitive pricing
prices are at a realistic price, high sales
disadvantages of competitive pricing
Still need to find ways of competing to attract sales.
what is promotional pricing
when a product is sold at a very low price for a short period of time
advantages of promotional pricing
1.useful for getting rid of unwanted stock
2.helps in renewing interest in a business if sales are failing
disadvantages of promotional pricing
revenue on each item will be lower so profits may be lower
what is psychological pricing
1.charging a very high price for a high quality product(status symbol)
2.charging a price just below a whole number
what is dynamic pricing
when customers are split in two or more groups based on their demand level
Factors that affect what pricing method should be used:
1.is it a new or existing product?
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.
Is the product unique?
If yes, then price skimming will be beneficial, otherwise competitive or promotional pricing.
Is there a lot of competition in the market?
If yes, competitive pricing will need to be used.
Does the business have a well-known brand image?
If yes, price skimming will be highly successful.
What are the costs of producing and supplying the product?
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 are the marketing objectives of the business?
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.
define price elasticity of demand
measure of the responsiveness of demand to a change in price
