Pricing - P2 Flashcards
How do business make a profit?
By selling goods at a price higher than its cost
What is profit the result of?
Interations between cost, volume and price
What does price elasticity of demand measure?
The change in demand as a result of a change in price
What is elastic demand?
very responsive to changes in price. Total revenue increases when price is reduced, revenue decreases when price is increased
What is inelastic demand?
Not very responsive to changes in price. Total revenue decreases when price is reduced, revenue increases when price is increased.
What factors affect price elasticity?
- Scope of the market
- Information within the market
- Availability of substitutes
- Complementary products
- Disposable income
- Neccessities
- Habit – Items consumers buy out of habit
What is total cost plus pricing
adding a mark-up on total cost of product.
What are the advantages of total cost plus pricing?
- Required profit will be made if budgeted sales volumes are achieved
- Cost-plus is quick and cheap to employ
- Useful to justifying selling prices to customers
What are the disadvantages of total cost plus pricing?
- If based on normal volume, and actual volume turns out to be lower overheads will not be full recovered
- Takes no account of factors such as competitor activity
- Overlooks the need for flexibility in the different stages of a products life cycle
What is marginal cost plus pricing?
Marginal cost is the same as variable cost
What is the advantages of marginal cost plus pricing?
- Gives management the option of pricing below total cost
- Recognises the existence of scarce or limiting resources.
What are the disadvantages of marginal cost plus pricing?
- Focused too much on internal costs rather than external conditions
- Fixed costs are ignored
- Company may find it hard to raise prices when margins are low
What are the different types of market based pricing?
Premium Pricing
Market skimming
Penetration pricing
Price differentiation
Loss leader pricing
Discount Pricing
What is premium pricing?
Pricing above competition on a permanent basis if product appears different and superior to competition
What is market skimming?
high price is set for the product initially so that only those who are desperately keen on it will buy it
