PRICING METHODS

Question 1

What is Price Skimming?

Answer 1

Setting a high price before other competitors come into the market.
Such products are often bought by customers who are prepared to pay a higher price to have the latest or best product in the market.

Question 2

What are the advantages of price skimming?

Answer 2

• Potential for high profits straight away

- Product may get reputation for quality, encouraging brand quality

Question 3

What are the disadvantages of price skimming?

Answer 3

• Cannot last for long, as competitors soon launch rival products which puts pressure on the price.
• May slow down growth of product due to its high price

Question 4

What is price penetration?

Answer 4

• Where a business tries to increase market share by offering a low initial price.

Question 5

Why do businesses use price penetration?

Answer 5

• to support a new product launch to draw consumers away from the competition.
• Their average profits would be low however market share is arguably more important in the long term.

Question 6

What are the advantages of price penetration?

Answer 6

• Builds customer usage and loyalty.

- Can help develop long-term profitability of having higher sales and a higher market share.

Question 7

What are the disadvantages of price penetration?

Answer 7

• likely to result in lower profits than would be the case if prices were set higher.
• It may be difficult to raise the selling price in the future.

Question 8

What is competitive pricing?

Answer 8

when a business sets its prices for its products and services based on what other firms in the market are charging.

Question 9

What are the advantages of competitive pricing?

Answer 9

Selling prices should be in line with rivals, so prices should be competitive and therefore attract customers.

Question 10

What are the disadvantages of competitive pricing?

Answer 10

• The business may need other ways to attract customers other than price. It may have to use non-price methods to compete,
• The business will need to research what its competitors are charging, which could increase costs and lower profits.

Question 11

What is cost-plus pricing?

Answer 11

Where a business charges the customer based on what it costs to produce the product or service. They put a percentage of what it cost to make it onto a price.

Question 12

What is the cost plus calculation?

Answer 12

Price = unit cost + (mark up x unit cost)

Question 13

What are the advantages of cost plus pricing?

Answer 13

A profit is guaranteed on each item sold.

Question 14

What are the disadvantages of cost plus pricing?

Answer 14

If the markup is set too high, the price may be expensive compared to rivals and therefore uncompetitive.