Pricing Strategies

Question 1

What is a strategy ?

Answer 1

A long term plan

Question 2

What is the pricing strategy?

Answer 2

This is a plan of how much to charge for a good or service

Question 3

What are the six types of pricing strategies?

Answer 3

• cost plus pricing
• price skimming
• predatory pricing
• penetration pricing
• competitive pricing
• physiological pricing

Question 4

What is cost plus pricing?

Answer 4

This is the pricing strategy where mark up is added to the unit price

Question 5

What is markup?

Answer 5

This is the total cost of production for the product.

Eg £5 cost = 100% markup = £10

Question 6

What is price skimming?

Answer 6

This involves charging a high price for a new product into the market before competitors arrive and then reducing it as more competitors enter the market

Question 7

What markets usually use price skimming?

Answer 7

Technological markets

Question 8

Adv of price skimming?

Answer 8

-people are prepared to pay higher prices
-maximising revenue
High rev covers the cost of research and development costs
-lower cost other costumer groups drawn into market- increased demand

Question 9

Disadvantages of price skimming?

Answer 9

• demand for product has to be inelastic

- will attract competitors into the market

Question 10

What is penetration pricing?

Answer 10

This is when the initial price is low for a limited period of time and then increases with time

Question 11

What is the aim of penetration pricing ?

Answer 11

To get a foothold in the market, as it attracts customers due to low prices and they gain behavioural habits of repeat purchases so the increase of price doesn’t affect the demand

Question 12

Adv of penetration pricing?

Answer 12

• good for targeting products to low/middle income groups
• sales of the product grow quickly
• faster growth allows economies of scale to be exploited
• this strategy can put pressure on the rivals
• the lower the costs the easier it is to implement

Question 13

What is penetration pricing?

Answer 13

Charging at extremely low prices which drive competitors out of the market

Question 14

What is competitive pricing?

Answer 14

When businesses operate in a very competitive market , the look closely at what their rivals are charging

Question 15

What are some approaches to this?

Answer 15

• charge the same price as competitors but establish usp etc

- the market leader to set a price and everybody follows

Question 16

What is psychological pricing?

Answer 16

• consumers are tricked into thinking that products are cheaper than they actually are

Question 17

What are factors that determine what pricing strategies the business should set for a particular situation?

Answer 17

• differentiation and usp
• the product elasticity of demand
• the amount of competitors in the market
• strength of the branD
• stage in the product life cycle
• production cost

Question 18

Differentiation and usp as a factor

Answer 18

• a business can charge higher prices if a product has a usp or is sufficiently differentiated .
• because consumers are prepared to pay ore the products with additional features

Question 19

Price elasticity of demand as a factor

Answer 19

If the demand for a firms product is price inelastic, there will be scope for price increases

• if a product is price elastic then charging higher prices would not be beneficial