Pricing

Question 1

name me some factors determining selling price

Answer 1

• Customer perception of the quality, utility or value of the product.
• Competitive environment
• Substitute products or degree of necessity.
• Product’s life cycle
• Legal factors
• Economic conditions
• Objective of the pricing decision (eg. to cover costs or make profit)
• Image management

Question 2

what does cost based pricing mean

Answer 2

Deciding on a selling price for a product or service based on the cost attributed to making and delivering that product or service.

Question 3

difference between mark up and margin

Answer 3

Mark-up is a % of cost
Margin is a % of selling price or revenue

Question 4

what is market penetration

Answer 4

Low prices when a product is first launched to generate strong sales demand. Usually this is followed by an increase in price once the new product has attracted customers.

Question 5

when is market penetration useful

Answer 5

• the new product has pre-existing
• The firm wants to discourage new entrants/competitors
• The firm can benefit from economies of scale so the low price can still generate profit
• Highly elastic demand

Question 6

what is market skimming

Answer 6

Charging high prices when a new product is first introduced to market.
This approach to pricing is seen most often where the seller has to recoup large investments in R&D and marketing.

Question 7

what is market skimming usually associated with

Answer 7

Products that have been expensive to develop and require large marketing outlays around the time of launch

Question 8

when can market skimming be useful

Answer 8

• the product is new and different from competitor products
• demand is not sensitive to price at least in the early stages

Question 9

how does demand affect pricing

Answer 9

usually the higher prices reduces the quantity of a product that is sold

Question 10

what is price elasticity of demand

Answer 10

A measure of the extent to which quantity demanded of a product or service changes in response to a change in price.

Question 11

how do u calculate PED

Answer 11

= % change in quantity / % change in price

Question 12

if something is inelastic what is the affect on revenue

Answer 12

increases revenue

Question 13

what is optimal pricing

Answer 13

The use of cost and market data to determine an ideal price which will determine either a profit-maximising price or a revenue-maximising price.

Question 14

what is the equation to determine optimum price

Answer 14

P = a -bQ
a = the theoretical maximum price
b = change in P / change in Q

Question 15

what is the relationship between price and quantity

Answer 15

linear

Question 16

what is marginal revenue

Answer 16

is the additional revenue gained from selling one more unit of product.

Question 17

equation for MR

Answer 17

MR = a -2bq

Question 18

what is marginal cost

Answer 18

the additional cost of making and selling one more unit of product

Question 19

how do you maximise profit

Answer 19

set a price which means that Q is at a point here marginal revenue is equal to MC

Question 20

how do u maximise revenue

Answer 20

set a price which means that q is at a point where MR is zero

Question 21

what is scarce resource

Answer 21

a resource that cannot satisfy demand

Question 22

what is the limiting factor

Answer 22

a factor that limits an organisation’s activities. This might be a scarce resource but it could be sales demand or a regulatory/legal factor

Question 23

what is shadow price

Answer 23

by how much contribution will increase if e could have one extra unit of the scarce resource

Question 24

what is the maximum willing to pay equation

Answer 24

acquisition price per unit + shadow price