Pricing essay

Question 1

Marketing mix

Answer 1

Price, product, place & promotion

Question 2

Cost information..

Answer 2

is used to facilitate the pricing decision

Question 3

Pricing below or at variable cost

Answer 3

launch/establish a new product
maintain sales during recession/difficult period
can only be sustained in short run
selling product as loss leader
driver out competitors

Question 4

Influence customers..

Answer 4

perceptions of quality

Question 5

Total cost based pricing

Answer 5

different total costs due to different overhead absorption
maintained for long periods
profit would eventually need to be earned to keep shareholders happy
actual output = expected then no profit will be made
output > expected then could make a profit overheads < expected could make a profit

Question 6

Total cost plus

Answer 6

mark-up equals profit

Question 7

Variable cost plus

Answer 7

mark up in total should = fixed costs plus required profit.
SP higher than unit variable cost each sale produces a contribution towards fixed costs & profit.
Short term, SP may be anything above the unit variable cost. E.g. hotels offer bargain breaks at weekends to bring in additional revenue & contribution when resources involved in providing this service would otherwise be lying idle.
Long term, mark-up must be high enough to produce a contribution sufficient to cover all fixed costs & produce required profit.

Question 8

Cost based pricing

Answer 8

covers overhead/profit as well as costs.
May carry forward inefficiency in costs – uncompetitive.
How big should the plus be?
Link with profit margin calculation from financial accounts. Calc unit cost, add mark-up to arrive at SP.

Question 9

Market based

Answer 9

price is determined by the market
pricing on basis of cost is not possible due to competition where customers easily switch between products.
Need to make the product seem different so can charge more.
Demand for inelastic goods is less sensitive when price changes

Question 10

Firm may seek to..

Answer 10

differentiate its product(s) by changing the product itself, which changes the unit variable cost, and/or by the use of advertising, which is a total fixed cost

Question 11

Importance of pricing

Answer 11

• Important for both profit making and non-profit making businesses
• Applies to products and services
• Will affect future cash flows and profits
• Can be external to the business or internal (transfer pricing)

Question 12

Factors influencing the pricing decision (Method of arriving at price depends on economic factors)

Answer 12

• Organisational goals
• Product mix
• Price/demand relationships
• Competitors & markets
• Marketing strategy
• Cost
• Product Life Cycle