Pricing Flashcards
Define Cost Plus Pricing
the cost of manufacturing the product plus a profit mark-up. It involves:
Estimating how many of the products will be produced.
Calculating the total cost of producing this output.
Adding a percentage markup for profit.
Total cost /output + % markup.
Advantages of Cost Plus Pricing
The method is easy to apply.
Different profit markups could be used in different markets.
Each product earns a profit for the business.
Disadvantages of Cost Plus Pricing
Businesses could lose sales if the selling price is higher than competitors.
A total profit will only be made if sufficient product units are sold.
There is no incentive to reduce costs.
Define Competitive Pricing
When the product is priced in line with or just below competitors’ prices to try to capture more of the market.
Advantages of competitive Pricing
Sales are likely to be high due to realistic level prices.
Avoids price competition
Often used when it is difficult for consumers to tell the difference between the products of different businesses.
Disadvantages of Competitve Pricing
High-quality products must be sold at higher prices to give them a high-quality image.
If cost is high and sales are low, competitive prices can lead to loss.
Detailed research will be needed to determine these prices, which costs time and money.
Define Price Skimming
setting a high price for a new product on the market. A product is usually a new invention or a new product development.
Advantages of Price Skimming
It can help establish the product as good quality.
If production is unique, a high price may lead to profit, and the price may be reduced.
High research and development costs can be rapidly recovered from profit made.
Disadvantages of Price Skimming
High prices may discourage some customers from buying it.
High prices and profitability may encourage competitors to enter.
Define Penetration Pricing
when the price is lower than the competitors’ to enter a new market.
Advantages of Penetration Pricing
Often used for newly launched products to create an impact on customers.
Ensure sales are made, and the new product enters the market.
Market share should build up quickly.
Disadvantages of Penetration Pricing
Sold at a low price; therefore, profit per unit may be low.
Customers may ‘get used‘ to low prices and reject the product if the price is raised.
It might not be appropriate for products that have a reputation for quality.
Define Promotional Pricing
when a product is sold at a low price for a short period of time. To increase short-term sales.
Advantages of Promotional Pricing
Useful for getting rid of unwanted inventory that will not sell.
Help renew interest in a product if sales are falling.
Disadvantages of Promotional Pricing
Revenue will be lowered because the price of each item is reduced.
This might lead to price competition with competitors
