chapter 13 - the marketing mix: price

Question 1

describe cost-plus pricing (2)

Answer 1

• Involves estimating how many units of the product will be produced, calculating the total cost of producing this unit, and adding a percentage markup for profit.
• total cost/output x %markup = profit on each unit

Question 2

benefits of cost-plus pricing (3)

Answer 2

 Sales are likely to be higher, and the product is not under or over-priced
 Avoids price competition
 Often used when it is difficult for consumers to tell the difference between the products of different businesses.

Question 3

limitations of cost-plus pricing (3)

Answer 3

 A competitive price could lead to losses being made if the costs of production for a business are high
 A higher quality product might need to be sold at a price above competitors’ prices
 Detailed research would be needed into what prices competitors are charging, and this costs time and money.

Question 4

benefits of competitive pricing (3)

Answer 4

 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.

Question 5

limitations of competitive pricing (3)

Answer 5

 A competitive price could lead to losses being made if the costs of production for a business are high
 A higher quality product might need to be sold at a price above competitors’ prices
 Detailed research would be needed into what prices competitors are charging, and this costs time and money.

Question 6

benefits of penetration pricing (3)

Answer 6

 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

Question 7

limitations of penetration pricing (3)

Answer 7

 The product is sold at a low price and therefore the profit per unit may be low.
 Customers might get used to the low prices.
 Might not be appropriate for a branded product with a reputation for quality.

Question 8

describe price skimming

Answer 8

• The product can be sold on the market at a high price and people will pay this high price because of the novelty factor.

Question 9

benefits of price skimming (3)

Answer 9

 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
 A high price will lead to profits being made before competitors launch similar products.

Question 10

limitations of price skimming (2)

Answer 10

 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.

Question 11

benefits of promotional pricing (2)

Answer 11

 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.

Question 12

limitations of promotional pricing (2)

Answer 12

 The revenue will be lower because the price of each item will be reduced
 It might lead to a price competition with competitors and the business might have to reduce prices again.

Question 13

dynamic describe dynamic pricing (2)

Answer 13

• Often customers can be split into two or more groups and are charged different prices for the same product or service due to the difference in price sensitivity.
• Dynamic pricing can also be used often when it is online, to reflect rapid changes in the level of demand. If demand increases then the price will be raised, and at times of low demand the price will be reduced.

Question 14

describe price elastic demand (3)

Answer 14

ow responsive the demand for a product is to changes in price is affected by how many close substitutes there are.
* If there are many close substitutes then even if its price rises only a small percentage, consumers will respond by buying the substitute product.
* Prices increase by 5% then sales decrease by 10% - falling revenue for the business – the percentage change in quantity demanded is greater than the percentage change in price.

Question 15

describe price inelastic demand (2)

Answer 15

• If there are not really any close substitutes for a product, then an increase in price of 15% will not cause much of a fall in sales – the percentage change in quantity demanded is less than the percentage change in price.
• Prices increase by 15% then sales decrease by 5% - increasing revenue for the business.