Chapter 13

Question 1

Competitive pricing

Answer 1

Priced in line or just below competitors prices to capture more market

Question 2

Penetration pricing

Answer 2

Set lower than competitors to enter a new market

Question 3

Price skimming

Answer 3

Where a high price is set for a new product

Question 4

Promotional pricing

Answer 4

When a product is sold at a very low price for a short time

Question 5

Dynamic pricing

Answer 5

When businesses change product prices, usually when selling online online, depending on the level of demand

Question 6

Price elastic demand

Answer 6

When customers are very sensitive to changes in price

Question 7

Price inelastic demand

Answer 7

Customers are not sensitive to changes in price

Question 8

Role of pricing in the marketing mix

Answer 8

The price must fit in with the rest of the marketing mix, can’t be too expensive for a cheap product and must be able to compete with competitors

Question 9

Why businesses adopt new pricing strategies (4)

Answer 9

To try break into new markets
To increase market share
To increase profits
To make sure all costs are covered and a target profit is earned

Question 10

Main methods of pricing (7)

Answer 10

Psychological
Cost-plus
Penetration
Dynamic pricing
Price skimming
Promotional pricing
Competitive pricing

Question 11

Cost-plus pricing

Answer 11

Cost of manufacturing the product plus a profit mark-up
Involves estimating the how many units will be produced, calculating the cost and adding a percentage mark-up for profit

Question 12

Benefits of cost plus pricing(3)

Answer 12

Easy to apply
Different profit markups can be used for different markets
Each product earns a profit for the business

Question 13

Limitations of cost plus pricing (3)

Answer 13

Business could lose sales if selling price is higher than competitors
Total profit only made if sufficient units of the product are sold
No incentive to reduce costs-increase is just passed on to the customer as a higher price

Question 14

Benefits of competitive pricing (3)

Answer 14

Sales likely to be high as the price is reasonable
Avoids price competition which reduces profits for all businesses in the industry
Can be used when it’s difficult for customers to tell the difference between the products of different businesses

Question 15

Limitations of competitive pricing (3)

Answer 15

If costs for a business is higher than its competitors it leads to losses
Higher quality product will need to be sold at a higher price than competitors to give it a better image
Expensive research needs to be conducted to decide what the price should be

Question 16

Benefits of penetration pricing (3)

Answer 16

Used for newly launched products as it creates an impact with customers
Should ensure sales are made and that the product enters the market successfully
Market share should build up quickly

Question 17

Limitations of penetration pricing (3)

Answer 17

Product sold at a low price, means profit may e low
Customers may get used to the low prices and reject the product if the business raises prices later
Might not be appropriate for a branded product with a reputation for quality

Question 18

Price skimming benefits (3)

Answer 18

Helps to establish the product as having good quality
Costs can be covered easily from the profit
If the product is unique, high price leads to high profits being made before competitors launch similar products

Question 19

Price skimming limitations (2)

Answer 19

High price may discourage potential customers from purchasing
High price + profitably may encourage more competitors to enter the market

Question 20

Promotional pricing benefits (2)

Answer 20

Useful for getting rid of unwanted inventory that won’t sell
Helps to renew interest in a product if sales are falling

Question 21

Promotional pricing limitations (2)

Answer 21

Revenue will be lower because the price on each item will be reduced
Might lead to a price competition with competitors, forcing them to reduce prices even further

Question 22

Psychological impacts of product pricing (4)

Answer 22

High price + quality - high income purchase it as a status symbol
Price set just below a whole number - appears cheaper
Supermarkets charge low prices for commonly bought items to make it seem like a good value for money
If the price enforces the customers perception of the product, repeat sales will be made

Question 23

What should a business do if the products are price elastic, what does it mean

Answer 23

They should not raise the price unless there are rising costs
There are many close substitution that consumers will flock to if the price is raised