Pricing Strategies

Question 1

What are the two pricing strategies for new products?

Answer 1

1. Price skimming

2. Price penetration

Question 2

What is price skimming?

Answer 2

Price skimming is where the product is set at a high price and as competition enters the market it lowers

Question 3

What is price penetration?

Answer 3

Price penetration is where the price is set low to gain market share and once the product is established the price increases

Question 4

What are the advantages of price skimming?

Answer 4

1. High prices for a new item help establish it as a must have item
2. Early buyers of the product tend to want exclusivity and are willing to pay higher prices
3. Innovation can be expensive so charging high prices can cover the investment cost

Question 5

What are the disadvantages of price skimming?

Answer 5

1. Some customers may be put off by ‘rip off pricing’ at the start of the product’s life
2. When the firm decides to cut its prices, its image may suffer
3. Buyers who bought early may be upset that prices fell soon after

Question 6

What are the advantages of price penetration?

Answer 6

1. Low priced products may attract high sales volume making it difficult for competitors to break into the market
2. High sales volumes helps cut production costs per unit as the producer can buy in bulk getting purchasing costs down
3. Achieving high sales volumes ensures that shops will provide high distribution levels and good in store displays

Question 7

What are the disadvantages to price penetration?

Answer 7

1. Pricing low may affect the brand image making the product seem cheap
2. It may be hard to gain distribution in more upmarket retail outlets due to mass market pricing
3. Pricing on the basis of value for money can cause customers to be very price sensitive

Question 8

What are the pricing strategies for existing products?

Answer 8

1. Cost-plus
2. Competitive
3. Predatory
4. Psychological

Question 9

What is cost plus?

Answer 9

Cost plus is a pricing strategy that adds a markup (%) to a products original unit cost to determine the final selling price

Question 10

What is competitive pricing?

Answer 10

This is when the price is set at the market level or at a discount to the market

Question 11

What is predatory pricing?

Answer 11

This is pricing low enough to drive a rival out of business

Question 12

What is the formula for cost plus pricing?

Answer 12

Unit cost + (% markup)

Question 13

What factors determine the appropriate pricing strategy?

Answer 13

1. Product differentiation
2. Strength of the brand
3. Amount of competition
4. Price elasticity of demand
5. Stage in the product life cycle
6. Costs and the need to make a profit