Pricing strategies

Question 1

How do you work out mark up?

Answer 1

Unit cost X mark up %

Question 2

What is cost plus pricing and what is a pro and a con of using it?

Answer 2

when a business bases a price on the unit cost and then adds a % as a mark up.

+ Simple rule that can be applied to multiple products

• Not based on competition or what the consumer is willing to pay (firm might price products too high and lose sales.)

Question 3

What is price skimming and what is a pro and a con of using it?

Answer 3

When a business sets an initial high price for a new product when it is high in demand and then over time price falls.

+ High price will increase profits in the short term and help to quickly recover new product development costs

-Low growth of market share may give opportunities for rivals to overtake with cheaper pricing strategies

Question 4

What is penetration pricing and what is a pro and con of using it?

Answer 4

When businesses penetrate the market with a price lower than competitors.

+ May help firm gain market share and brand loyalty

• Low prices may reduce profitability in the short-run and lower the prestige of the company’s products (which could also damage profitability in the long-run).

Question 5

What is predatory pricing and what are the pros and cons of using it?

Answer 5

When a business deliberately sells at a low price and maybe even at a loss to force competitors out of the market and increase prices later on.

+ If successful may leave firm in a monopoly position with ability to raise prices due to a lack of competition

• Illegal and may result in fines

Question 6

What is competitive pricing and what are some of the pros and cons?

Answer 6

When a business sets prices based on their competitors, this is used in markets such as oligopolies to avoid price wars.

+If rival firms know a business is pursuing competitive pricing, they may be less likely to cut prices as they know it could then lead to a price war which would damage profitability

• If a business is strongly differentiated from competitors, then demand may be price inelastic, and it may be able to charge higher prices than competitors without losing many sales leading to higher profitability

Question 7

What is psychological pricing?

Answer 7

When a business prices its products below the next whole number to trick consumers into thinking it is cheaper e.g. £9.99 instead of £10

Question 8

What pricing strategy can be used for both existing and new products?

Answer 8

psychological pricing

Question 9

What pricing strategies are used for new products?

Answer 9

Price skimming and penetration pricing

Question 10

What pricing strategies are applied to existing products?

Answer 10

competitive pricing and cost plus pricing

Question 11

What 2 pricing strategies are used for products that are differentiated?

Answer 11

Price skimming and cost plus

Question 12

What 2 pricing strategies are used for products that are cost competitive?

Answer 12

penetration pricing and competitive pricing

Question 13

What are the 6 factors that determine the most appropriate pricing strategy?

Answer 13

1. Price elasticity of demand
2. amount of differentiation
3. Level of competition
4. strength of brand
5. stage in product life cycle
6. Costs and the need to make a profit

Question 14

Why do online retailers need to be more price competitive?

Answer 14

As it is easy for customers to compare prices for identical products

Question 15

Why are price comparison sites beneficial for consumers?

Answer 15

They save customers time and effort in their search for the lowest prices.

Question 16

Why might price comparison sites be bad for retailers?

Answer 16

It means retailers need to know the prices of their competitors so they can adjust their prices to remain competitive