chapter 13 Flashcards
A business can adopt new pricing strategies for several reasons, including:
- to try to break into a new market
- to try to increase its market share
- to try to increase its profits
- to make sure all its costs are covered and a target profit is earned
define cost plus pricing
Cost-plus pricing is the
cost of manufacturing
the product plus a profit
mark-up
cost plus pricing involves:
- estimating how many units of the product will be produced
- calculating the total cost of producing this output
- adding a percentage mark-up for profi
what are some of the benefits of cost plus pricing
- The method is easy to apply.
- Different profit mark-ups could be used in different markets.
- Each product earns a profit for the business
what are some of the limitations of cost plus pricing
- Businesses could lose sales if the selling price is higher than competitors’ prices.
- A total profit will only be made if sufficient units of the product are sold.
- There is no incentive to reduce costs – any increase in costs is just passed on
to the customer as a higher price
how do we calculate the profit on each unit
total cost / output × % mark-up = profit on each unit
define competitive pricing
Competitive pricing is
when the product is priced
in line with or just below
competitors’ prices to try
to capture more of the
market
what are the benefits of competitive pricing
- Sales are likely to be high as the price is at a realistic level and the product is not under- or over-priced.
- Avoids price competition, which can reduce profits for all businesses in the
industry. - Often used when it is difficult for consumers to tell the difference between the
products of different businesses
what are some of the limitations of competitive pricing
- If the costs of production for a business are higher than those of competitors– perhaps because the product is of a higher quality – then a competitive price could lead to losses being made.
- A higher quality product might need to be sold at a price above competitors’
prices to give it a higher quality image. - In order to decide what this price should be, detailed research would be needed
into what prices competitors are charging, and this research costs time and
money.
what are the limitations of penetration pricing
- The product is sold at a low price and therefore the profit per unit may be low.
- Customers might ‘get used’ to low prices and reject the product if the business
starts to raise the price after the product’s early success. - Might not be appropriate for a branded product with a reputation for quality
define penetration pricing
Penetration pricing is
when the price is set lower
than the competitors’
prices in order to be able to
enter a new market.
what are the benefits of penetration pricing
- Often used for newly launched products to create an impact with customers.
- It should ensure that sales are made and the new product enters the market
successfully. - Market share should build up quickly.
define price skimming
Price skimming is where a
high price is set for a new
product on the market
what are the benefits of price skimming
- Skimming can help to establish the product as being of good quality.
- High research and development costs can be rapidly recouped from the profit
made on the product at the high price. - If the product is unique, a high price will lead to profits being made before
competitors launch similar products – then the price will have to be reduced.
what are the limitations of price skimming
- The high price may discourage some potential customers from buying it.
- The high price and high profitability may encourage more competitors to enter
the market
define promotional pricing
Promotional pricing is
when a product is sold at
a very low price for a short
period of time
what are the benefits of promotional banking
- It is useful for getting rid of unwanted inventory that will not sell.
- It can help to renew interest in a product if sales are falling, for example
during an economic recession.
what are the limitations of promotional banking
- The revenue will be lower because the price of each item will be reduced.
- It might lead to a price competition with competitors – so the business might
have to reduce prices again.
what are the the impacts of psychology on price decisions
- A very high price for a high-quality product may mean that high-income customers wish to purchase it as a status symbol
- Supermarkets may charge low prices for products purchased on a regular basis,
which will give customers the impression of being given good value for money. - Repeat sales are often made when the price reinforces consumers’ perceptions
of the product – this may be its brand image when the price is set high.
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define price elasticity of demand
Price elastic demand
is where consumers are very
sensitive to changes in price
define price inelastic demand
Price inelastic demand
is where consumers are not
sensitive to changes in price
