Pricing methods

Question 1

What are the 5 pricing strategies

Answer 1

Price penetration
Loss leader pricing
Price skimming
Competitive pricing
Cost-plus pricing

Question 2

Explain price penetration

Answer 2

When a firm charges a low price to encourage loss of people to try it.
It’s a good way to increase market share in a competitive market.
Little profit will be made but once the product is established the price will be raised

Question 3

Explain loss leader pricing

Answer 3

When the price of a product is set below cost to attract customers to buy it but also buy other products with it to cover the costs

Question 4

Explain price skimming

Answer 4

When firms know there will be high demand for a product they will often set it at a high price and it has a high usp.
This method is more for established firms eg apple that has loyal customers willing to pay the high price
Helps increase revenue and cover investment costs
Once it is established price is lowered to help it becomes more mass market

Question 5

Explain competitive pricing

Answer 5

This is when firms set prices similar to other firms
Happens when there is lots of choice and nit much product differentiation
May make little profit so have to find other ways to attract customers

Question 6

Explain cost-plus pricing

Answer 6

This may be used when firms are not in price competition with other firms.
Firm works out total cost of production and then add on additional price for profit

Question 7

Cost-plus pricing methods:mark-up

Answer 7

Mark-up
Work out how much product costs and then then add percentage mark up.
Eg product costs £2 to make and 25% markup = £2+25%= £2.50

Question 8

which pricing methods are external

Answer 8

• how much competition there is in the market
• the cost of raw materials
• the segment of the market