pricing strategies

Question 1

what is cost plus pricing?

Answer 1

• The cost to produce the products are worked out then the money is added on top
• Add a profit margin as a monetary value or add a percentage mark-up
• Considers profit margin business is willing to accept

Question 2

benefit and drawbacks of cost-plus pricing

Answer 2

+ Easy to calculate and justify

- Ignores PED, product not market-orientated

Question 3

what is competitive pricing?

Answer 3

• Products/services prices are in line with competitors
• Business has no market power to set a different price
• Customers judge product/service on ‘non-price’ factors such as quality
• Used in very competitive markets and helps avoid price wars

Question 4

benefit and drawbacks of competitive pricing

Answer 4

+ Scope to develop non-price factors

- Shows a weak brand/product differentiation

Question 5

what is price skimming?

Answer 5

• Product priced high to begin with as it has a desirable factor
• Customers want it when its new
• Usually applies to technology with short product lifecycle

Question 6

benefit and drawbacks of price skimming

Answer 6

+ Greater profit early on

- Ineffective as new competitors appear

Question 7

what is penetration pricing?

Answer 7

• Setting prices really low on a new product
• Designed to encourage sales and to persuade customers to try the product
• Low prices should gain business more market share
• Prices rise once loyalty established
• Applies to new product attempting to enter market

Question 8

benefit and drawbacks of penetration pricing

Answer 8

+ Establishes foothold in the market

- Low profit and to some symbolizes poorer quality

Question 9

what is predatory pricing?

Answer 9

• Purposely lower prices so that any competitor cannot make a profit if entering the market/drive out existing businesses. Normally businesses with high market power can do this
• Often so low they make a loss on each item sold

Question 10

benefit and drawbacks of predatory pricing

Answer 10

+ Creates a dominance

- Only works with strong brand/elastic product or a business in a strong financial position

Question 11

what is psychological pricing?

Answer 11

• E.g. £1.99 instead of £2 to appear cheaper
• Attracts those looking for value
• High value items like luxury cars avoid pricing just below but instead may price higher to match customers’ expectations

Question 12

benefits and drawbacks of psychological pricing

Answer 12

+ Can compete against rivals

- Cheap means poor quality to some

Question 13

factors to determine pricing strategy

Answer 13

1. Brand strength
2. Level of competition (number of substitutes)
3. Stage of product life cycle (new/old?)
4. USP/amount of differentiation
5. PED; how sensitive is the product? Potential to change price
6. Need for profit