Pricing Decisions (4) Flashcards
What is price skimming?
Involves charging high prices when a new product is furst launched on the market, maximising short-term profitability
What is the aim of market skimming?
Gain high unit profits early in the product’s life
What if the product moves into the later stages of its life cycle?
Progressively lower prices will be charged
Early stages of a product lifecycle?
There is heavy spending on advertising and sales promotion to obtain sales
When is market skimming useful (new and different)
The product is new and different, so early adopters are prepared to pay high prices to be seen to own the latest products
When is market skimming useful (unknown)
The strength of demand and sensitivity of demand to price are unknown
When is market skimming useful (high initial cash outflows)
High prices in early stages of a product’s life might generate high initial cash outflows. useful for firm with liquidity problems
When is market skimming useful (short life cycle)
Product has a short life cycle and needs to recover development costs and make a profit quickly
What is price discrimination?
Practice of charging different prices for the same product to different groups of buyers when these prices are not reflective of cost differences
What happens when a company can sell into two or more separate markets?
Might be able to charge a different price in each market
How can the company be successful for price discrimination?
Company must prevent the transfer of goods from the cheap market to the more expensive one
Bases for discriminating prices?
By market segment, product version, place and timeh
How can price dscrimination only be effective if (segmentable)
Market must be segmentable in price terms, and different sectors must show different intensities of demand
How can price dscrimination only be effective if (black market)
Little to no chance of a black amrket developing
How can price dscrimination only be effective if (competitors)
Little to no chance that competitors can and will undercut firm’s prices in higher priced market segments
How can price dscrimination only be effective if (segmenting and administering)
Cost of segmenting and administering the arrangements should not exceed extra revenue derived from price discrimination strategy
What is product-line pricing?
Product line may be a range of branded products, and a consistent pricing policy should be applied to all products in the range
Where is focus placed in product-line pricing?
On the profit from the whole range rather than the profit on each single product
Product line pricing strategies (proportional)
Set prices proportional to full or marginal cost with same % profit margin for all products
What are prices dependent on?
Prices are dependent on cost and ignore demand
Product line pricing strategies (demand relationship)
Set prices reflecting the demand relationships between products so that an overall required rate of return is achieved
Product line pricing strategies (customer opinion)
Set prices that reflect customer opinion about quality of products, and how they compare with similar products of competitor organisations
