Price Flashcards

1
Q

What are the 8 pricing strategies?

A

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

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2
Q

What is cost plus pricing?

A

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.

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3
Q

What are the advantages of cost plus pricing?

A

A quick and easy way of setting the selling price.

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

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4
Q

What are the disadvantages of cost plus pricing?

A

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.

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5
Q

What is competitive pricing?

A

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

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6
Q

What are the advantages of competitive pricing?

A

Avoids a price war.

Encourages competition, which improves the market as a whole.

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7
Q

What are the disadvantages of competitive pricing?

A

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

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8
Q

What is price skimming?

A

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

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9
Q

What are the advantages of price skimming?

A

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.

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10
Q

What are the disadvantages of price skimming?

A

High initial prices can put off some customers.

Technique results in low initial sales numbers.

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11
Q

What is penetration pricing?

A

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

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12
Q

What are the advantages of penetration pricing?

A

Encourages customers to try a new product.

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

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13
Q

What are the disadvantages of penetration pricing?

A

Very little profit can be generated during the initial low price period.

Could result in a price war if competitors set lower prices too.

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14
Q

What is price discrimination?

A

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.

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15
Q

What are the advantages of price discrimination?

A

Ensures products appeal to different market segments.

Allows for high profit margins on some price brackets.

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16
Q

What are the disadvantages of price discrimination?

A

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.

17
Q

What is destroyer pricing?

A

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

18
Q

What are the advantages of destroyer pricing?

A

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

Increases market share.

19
Q

What are the disadvantages of destroyer pricing?

A

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.

20
Q

What are loss leaders?

A

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

21
Q

What are the advantages of loss leaders?

A

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

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

Encourages repeat purchases.

22
Q

What are the disadvantages of loss leaders?

A

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

23
Q

What is psychological pricing?

A

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

24
Q

What are the advantages of psychological pricing?

A

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.

25
Q

What are the disadvantages of psychological pricing?

A

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.

26
Q

What are the factors affecting pricing strategy?

A

Target market for the product

Demand for the product

Objectives of the business

External factors

Cost of the product

27
Q

Target market for the product

A

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.

28
Q

Demand for the product

A

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.

29
Q

Objectives of the business

A

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.

30
Q

External factors

A

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.

31
Q

Cost of the product

A

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.