Price

Question 1

What is the use of Pricing Strategies?

Answer 1

A business will use different pricing strategies for different products in its portfolio.

Question 2

What is all the pricing strageies?

Answer 2

• Cost plus
• Competitive
• Skimming
• Penetration
• Price discrimination
• Destroyer/predatory
• Loss leaders
• Psychological

Question 3

What is Cost plus?

Answer 3

The business calculates the unit cost of a product and then adds a percentage mark-up for profit.

Example: It costs PC World £300 to purchase a laptop which they then mark up by 50% and sell to customers for £450.

Question 4

What are advantages of Cost plus?

Answer 4

• A quick and easy way of setting the selling price.
• Ensures that total costs are covered and a profit is generated.

Question 5

What are disadvantages of Cost plus?

Answer 5

• Doesn’t cover indirect costs, e.g. other expenses such as rent.
• Doesn’t take external factors into account, e.g. increasing prices during boom periods to maximise profits.

Question 6

What is Competitive?

Answer 6

The price of a product is set similar to the competitors, e.g. fuel prices.

Question 7

What are advantages of Competitive?

Answer 7

• Avoids a price war.
• Encourages competition, which improves the market as a whole.

Question 8

What are disadvantages of Competitive?

Answer 8

• Other elements of the marketing mix must be better than the competition’s to ensure sales.

Question 9

What is Skimming?

Answer 9

The price is set high to begin with and lowers overtime.

Example: With electronics, such as IPad, PS5, etc.

Question 10

What are advantages of Skimming?

Answer 10

• Sufficient ‘hype’ around a new product enables higher prices to be charged, which can increase profits.
• Lack of competition also allows maximum prices to be charged.

Question 11

What are disadvantages of Skimming?

Answer 11

• High initial prices can put off some customers.
• Technique results in low initial sales numbers.

Question 12

What is Penetration?

Answer 12

The price is set low to start with then begins to increases over time.

Example: ‘trial prices’ on new chocolate bars.

Question 13

What are advantages of Penetration?

Answer 13

• Encourages customers to try a new product.
• The business hopes to gain repeat custom once prices rises.

Question 14

What are disadvantages of Penetration?

Answer 14

• Very little profit can be generated during the initial low price period.
• Could result in a price war if competitors set lower prices too.

Question 15

What is Price discrimination?

Answer 15

Prices are altered depending on a discriminating factor.

Example: Different prices often charged in the transport industries depending on age, such as a child price, adult price and senior citizen price.

Question 16

What are advantages of Price discrimination?

Answer 16

• Ensures products appeal to different market segments.
• Allows for high profit margins on some price brackets.

Question 17

What are disadvantages of Price discrimination?

Answer 17

• Harder to budget for sales revenue in advance.
• Loss in potential revenue from selling at a cheaper price, e.g. a child taking a seat at a football match that could have attracted the full price from an adult.

Question 18

What is Destroyer/predatory?

Answer 18

The price is deliberately set extremely low for a period of time to force out competitors.

Question 19

What are advantages of Destroyer/predatory?

Answer 19

• Competitors are forced out of the market, the prices can increase again.
• Increase market share.

Question 20

What are disadvantages of Destroyer/predatory?

Answer 20

• Can only be used by larger companies that can afford to make losses while prices are low.
• This illegal practice could breach the CMA’s anti-competition regulations.

Question 21

What is Loss leaders?

Answer 21

A promotional price of one or more products is set unprofitably low to entice customers in to buy other products.

Question 22

What are advantages of Loss leaders?

Answer 22

• Creates greater footfall, i.e. brings customers to the business.
• Hopefully, customers will buy normal priced products while buying loss leaders.
• Encourages repeat purchases.

Question 23

What are disadvantages of Loss leaders?

Answer 23

• There is a risk that some customers will only buy the loss leader, impacting on profits.

Question 24

What is Psychological?

Answer 24

The price is set just below the next rounded number, e.g. £49.99 instead of £50.00.

Question 25

What are advantages of Psychological?

Answer 25

• Makes the customer think the product is much cheaper than it actually is.
• Products fit price bands customers have in mind, e.g. car at £9,999.99 instead of £10k means a customer looking for a ‘sub £10k’ car would consider it and it would show up on internet searches with < £10k as the search criteria.

Question 26

What are disadvantages of Psychological?

Answer 26

• Calculating total money owe or giving change can be more difficult.
• Some customers may ignore the attempt at making the product seem cheaper so the rest of the marketing mix would have to convince them to purchase.

Question 27

What are the factors affecting the pricing strategy?

Answer 27

• Target market for the product
• Demand for the product
• Objectives of the business
• External factors
• Cost of the product.

Question 28

What is the description of target market for the product.

Answer 28

Mass-market products need to be priced in a way that will appeal to most income segments, whereas exclusive products aimed at wealthy segments can be priced higher.

Question 29

What is the description of demand for the product?

Answer 29

If the demand for a product is high, then the business can maximise profits by setting the price high; once demand drops, it can lower the price to encourage sales.

Example: The most popular Christmas toy each year is always in high demand, so sells for a high price. ‘January sales’ are a result of demand dropping after the Christmas rush.

Question 30

What is the description of objectives of the business?

Answer 30

If the objective is to maximise sales, a lower price might be offered. If the objective is to maximise profits, a higher price may be set.

Question 31

What is the description of external factors?

Answer 31

Prices should be lowered during a recession to encourage sales or increased during boom periods to maximise profits. Similarly, prices may have to be lowered to respond to the prices offered by competitors.

Question 32

What is the description of cost of the product?

Answer 32

Any pricing strategy should take into account the cost to produce the product (unit cost) as well as other costs that need to be covered, such as rent. For this reason, loss leaders and destroyer pricing should be used sparingly and for short periods.