Lecture 5: Entrepreneurial Pricing (Part 1)

Question 1

What is cost based pricing?

Answer 1

Setting prices based on the costs.

Question 2

What are the pros of cost based pricing?

Answer 2

Straightforward, low cost, predictable

Question 3

What are the cons of cost based pricing?

Answer 3

Ignores competition, ignores value and marketplace potential, focuses customers on the
wrong thing (e.g., time spent vs.
your expertise)

Question 4

Should I use cost base pricing?

Answer 4

No because there’s no relation between customer WTP and actual company costs.

Question 5

What is competitive pricing?

Answer 5

Setting prices based on competitor’s strategies,

prices, costs, and market offerings.

Question 6

What are the pros of competitive pricing?

Answer 6

Simple, low risk, accurate

Question 7

What are the cons of competitive pricing?

Answer 7

Overreliance on others, ignores value and marketplace potential, detached from market factors.

Question 8

What is value based pricing?

Answer 8

Setting a price based on buyers’ perception of
value rather than on the seller’s cost. Pricing begins with analysing
consumer needs and value perceptions, and the price is set to match the
perceived value.

Question 9

How to use value based pricing?

Answer 9

1. What are the needs of your customers?
2. How does your product meet these needs (better than competitors)?
3. Communicate the value you provide
4. Do not be afraid to price accordingly

Question 10

What is discriminatory pricing?

Answer 10

Charging different customers different prices

Question 11

How to use discriminatory pricing?

Answer 11

Find variation in how customers value the product, offer price schemes
targeted to specific customers segments

Question 12

Why not use freemium?

Answer 12

You don’t know how much customers are willing to pay
You need people to use your app over and over again
Freemium isn’t a business model, it’s a scaling strategy

Question 13

What’s dynamic pricing?

Answer 13

Prices fluctuate based on market and customer

demand (e.g., hotels, airlines, event venues, utility companies)

Question 14

What’s skimming pricing?

Answer 14

Start high, progressively lower as popularity declines
(e.g., technology products, such as DVD players, video game consoles,
and smartphones).

Question 15

What’s penetration pricing?

Answer 15

Start super low; not a long term strategy

Question 16

What are the consumer-generated prices?

Answer 16

Auctions, name your own price, negotiations, pay what you wish

Question 17

Does high market share mean high profits? and why?

Answer 17

No, because market share and profitability are not related.

Question 18

What means elastic demand?

Answer 18

Change in price leads to bigger change in demand.

Question 19

What means inelastic demand?

Answer 19

Change in price leads to smaller change in demand.

Question 20

Characteristics of elastic demand

Answer 20

Very competitive, bought frequently, not necessities, relatively expensive

Question 21

Characteristics of inelastic demand

Answer 21

• They have few or no close 
substitutes (e.g. petrol)
• They are necessities (e.g. if you 
have a car, you need to keep 
buying petrol, even if price of 
petrol increases)
• They are addictive (e.g. 
cigarettes)
• They cost a small % of income