P2 - 9. Pricing

Question 1

What are the two driving considerations when setting prices?

Answer 1

1. Attractive to customers

2. Makes the business profitable over the long term

Question 2

What is a market driven optimum pricing approach?

Answer 2

Consider the quantity of business products that are demanded by consumers at different price levels

Question 3

What is perfect competition?

Answer 3

A business can sell as many items as it wishes at the prevailing market price but it cannot have any influence over that market price

Question 4

What is the selling strategy under perfect competition?

Answer 4

Sell as much as possible

Question 5

What is imperfect competition?

Answer 5

In order to sell more items the price has to be lowered - inverse relationship between price and quantity demanded

Question 6

What is the selling strategy under imperfect competition?

Answer 6

There will be a specific price and demand contribution that leads to a profit maximizing position

Question 7

What is the equation for the price/demand relationship under imperfect competition?

Answer 7

P = a - bX
Where a = price above which sales are zero and
b = change in price/ change in quantity

Question 8

What is the point at which profit is maximised?

Answer 8

Marginal Revenue = Marginal Cost

Question 9

What is the point at which revenue is maximised?

Answer 9

Marginal revenue = 0

Question 10

What does price elasticity of demand measure?

Answer 10

How much the quantity of a good is affected by a change in price of that good

Question 11

What is the equation for price elasticity of demand?

Answer 11

% Change in Quantity / % Change in Price

Question 12

What does PED > 1 mean?

Answer 12

Price sensitive, elastic - change in price leads to bigger change in demand

Question 13

What does PED < 1 mean?

Answer 13

Price insensitive, inelastic - change in price leads to smaller change in demand

Question 14

What 4 things influence price sensitivity?

Answer 14

1. Number of competitors
2. Similarity of competitor products
3. Amount of disposable income taken up
4. Necessity or luxury item?

Question 15

Why do many companies opt for cost as a basis for pricing?

Answer 15

It can be difficult to identify the price/demand relationship

Question 16

What is the benefit of using marginal cost as a basis for pricing?

Answer 16

Useful as a minimum price where there is spare capacity

Question 17

What is the risk of using marginal cost as a basis for pricing?

Answer 17

Fixed costs may be ignored, and these do need to be covered in the long term

Question 18

What is the benefit of using relevant cost as a basis for pricing?

Answer 18

Useful as a minimum price where there are scarce resources, as it incorporates opportunity cost

Question 19

What are the 2 benefit of full absorption cost as a basis for pricing?

Answer 19

Guarantees that costs are covered (assuming that budgeted demand is covered) and fairly quick and easy to set up

Question 20

What is the risk of using full absorption cost as a basis for pricing?

Answer 20

Need to ensure that customers are happy to pay

Question 21

What are the 2 benefits of using standard cost as a basis for pricing?

Answer 21

1. Selling price is kept stable

2. Internal inefficiency is borne by the organisation

Question 22

What are the 3 main benefits of using cost as a basis for setting prices?

Answer 22

1. Simple and easy to implement
2. Based on readily available data
3. Easily understood by most staff

Question 23

What are the 3 main considerations for what margin/markup to use?

Answer 23

1. What is the target ROCE for the company
2. What are competitors prices
3. What margins are obtained on similar products

Question 24

What 4 main reasons might lead to a change in pricing strategy?

Answer 24

1. Stage in product life
2. Entry of competitors
3. Different geographical demands
4. Changes in technology

Question 25

What is market skimming?

Answer 25

Initially charging high prices to recover upfront costs, then lowering as it becomes more mature

Question 26

When is market skimming most often used?

Answer 26

High technology products that get updated quickly

Question 27

What is premium pricing?

Answer 27

Products marketed as higher quality to justify a permanently higher price

Question 28

What is penetration pricing?

Answer 28

A low initial price is set to gain high volumes and market share

Question 29

Why does penetration pricing create a barrier to entry for other companies? (2)

Answer 29

1. Potential profits aren’t attractive

2. Can’t achieve economies of scale to achieve lower unit cost

Question 30

What is loss leader pricing?

Answer 30

Products sold at very low prices with the intention that customers will buy other products to go with it that will generate profits

Question 31

What is product bundling?

Answer 31

Selling a combination of products together in a package that is lower than the sum of each individual product

Question 32

What is price discrimination?

Answer 32

A different price is charged in a different market segment due to different price/demand relationships in each segment

Question 33

What are 4 possible options for price differentiation?

Answer 33

1. Time
2. Age of consumer
3. Geographical market
4. Type of consumer (wholesale/retail)