price Flashcards
what is a price taker
- A business that has to accept the price set by the market.
- This is the only option under perfect competition.
What are Market-Orientated Pricing Strategies?
Pricing strategies that focus on what the market is willing to accept. Businesses using this approach produce what the market wants and price accordingly.
What is a “Price Maker”?
A business that has the opportunity to use pricing strategies because they are not bound by a perfectly competitive market.
What are Cost-Based Pricing Strategies?
Pricing strategies that focus on the internal costs of production. Businesses using this approach are product-oriented.
Define Penetration Pricing.
Pricing a product low to gain market share, encouraging large quantity purchases by retailers and consumers.
Define Price Skimming.
Charging a high price for a product with a unique selling point (USP) for a limited time, targeting the most profitable segment first before lowering the price for a wider market.
What are the advantages of Price Skimming?
- Capitalizes on product newness to maximize revenue/profit before competitors enter.
- Recovers high R&D costs quickly.
- Funds further investment in the product
Define Loss Leader Pricing.
Selling products at a loss to attract customers and generate further sales of other, more profitable items. The goal is to recoup the initial loss and make an overall profit.
What are the disadvantages of Penetration Pricing?
- Customers may perceive low price as low quality.
- May initially result in revenue loss.
- Not suitable for products with short life cycles.
Define Going Rate Pricing.
Accepting the current market pricing structure, often used by smaller businesses that must align their prices with competitors.
What is the main advantage of Penetration Pricing?
- It helps businesses seeking to gain a foothold in a market and increase market share.
- Can also build brand loyalty.
Define Destroyer/Predatory Pricing.
Setting prices extremely low to drive competitors out of the market. This is often illegal due to its anti-competitive nature.
What is the main issue with Destroyer/Predatory Pricing?
It is often seen as anti-competitive and is therefore illegal.
Give examples of Loss Leader Pricing.
- Supermarkets discounting staple goods like bread or milk.
- Mobile phone companies offering “free” phones with contracts.
Define Contribution Pricing.
- Contribution pricing is a pricing strategy where the price is set based on the contribution per unit
- aims to ensure each sale contributes toward covering fixed costs and then generating profit
Define Cost Plus Pricing
Adding a profit percentage (mark-up) to the average cost of producing a good
What is an advantage of Cost Plus Pricing?
- Simple to calculate and ensures every good is sold at a profit.
- gains back production cost
What are the disadvantages of Cost Plus Pricing?
- Ignores competitors’ actions.
- Doesn’t account for currency fluctuations (for exporters).
- May not maximize profit if a higher price could be charged.
Define Psychological Pricing
Setting prices at levels that consumers perceive as good value. This might involve setting prices just below a round number (e.g., £19.99 instead of £20).
Give an example of Psychological Pricing.
- An example of psychological pricing is pricing a product at £9.99 instead of £10.00.
- This strategy makes the price appear lower than it actually is because customers often perceive it as being in the £9 range rather than £10, even though the difference is just one penny
What are the advantages of using pricing strategies effectively?
- Increased sales, revenue, and profits.
- Targeting specific market segments.
- Reflecting the market (e.g., price skimming).
- Responding to competitors’ actions.
What are the disadvantages of using pricing strategies?
- Competitors may follow the same strategy, negating its effect.
- Customers may not be attracted by the strategy.
- May require expensive advertising.
- Some segments may be unhappy with the pricing (e.g., price discrimination).
What is the impact of pricing on the number of buyers?
- Too High Price: Fewer Buyers
- Priced Right: Optimal Number of Buyers
- Too Low Price: Too Many Buyers (potentially unsustainable)
