Price

Question 1

What are the 8 pricing strategies?

Answer 1

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

Question 2

What is cost plus pricing?

Answer 2

The business calculates the unit cot of a product and then adds a percentage mark-up for profit e.g. it cots PC World £300 to purchase a laptop which they then mark up by 50% and sell to the customer for £450.

Question 3

What are the advantages of cost plus pricing?

Answer 3

A quick and easy way of setting the selling price.

Ensures that total costs are covered and a profit is generated.

Question 4

What are the disadvantages of cost plus pricing?

Answer 4

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 5

What is competitive pricing?

Answer 5

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

Question 6

What are the advantages of competitive pricing?

Answer 6

Avoids a price war.

Encourages competition, which improves the market as a whole.

Question 7

What are the disadvantages of competitive pricing?

Answer 7

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

Question 8

What is price skimming?

Answer 8

The price is set high to begin with and lowers over time e.g. with electronics, such as the iPad, PS4 etc.

Question 9

What are the advantages of price skimming?

Answer 9

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 10

What are the disadvantages of price skimming?

Answer 10

High initial prices can put off some customers.

Technique results in low initial sales numbers.

Question 11

What is penetration pricing?

Answer 11

The price is set lo to begin with and increases over time e.g. ‘trial prices’ on new chocolate bars.

Question 12

What are the advantages of penetration pricing?

Answer 12

Encourages customers to try a new product.

The business hopes to gain repeat custom once the price rises.

Question 13

What are the disadvantages of penetration pricing?

Answer 13

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 14

What is price discrimination?

Answer 14

Prices are altered depending on a discriminating factor e.g. different prices are often charged in the transport industries depending on age, such as child price, adult price and senior citizen price.

Question 15

What are the advantages of price discrimination?

Answer 15

Ensures products appeal to different market segments.

Allows for high profit margins on some price brackets.

Question 16

What are the disadvantages of price discrimination?

Answer 16

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 17

What is destroyer pricing?

Answer 17

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

Question 18

What are the advantages of destroyer pricing?

Answer 18

Competitors are forced out of the market, then prices can increase again.

Increases market share.

Question 19

What are the disadvantages of destroyer pricing?

Answer 19

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 20

What are loss leaders?

Answer 20

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

Question 21

What are the advantages of loss leaders?

Answer 21

Creates greater footfall i.e. bring customers to the business.

Hopefully, customers will buy normal priced products while buying loss leaders.

Encourages repeat purchases.

Question 22

What are the disadvantages of loss leaders?

Answer 22

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

Question 23

What is psychological pricing?

Answer 23

The price is set just below the next rounded number e.g. £49.99 instead of £50.

Question 24

What are the advantages of psychological pricing?

Answer 24

Makes the customer think the product is much cheaper than it actually is.

Products fit price bands customers have in mind, for example, pricing a car at
£9,999.99 instead of the rounded up
£10,000 means a customer looking for a
‘sub £10,000’ car would consider it and it
would show up on internet searches with
<£10,000 as the search criteria.

Question 25

What are the disadvantages of psychological pricing?

Answer 25

Calculating total money owed 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 26

What are the factors affecting pricing strategy?

Answer 26

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

Question 27

Target market for the product

Answer 27

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

Question 28

Demand for the product

Answer 28

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 e.g. 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 29

Objectives of the business

Answer 29

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 30

External factors

Answer 30

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

Question 31

Cost of the product

Answer 31

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.