Pricing Strategies

Question 1

Pricing

Answer 1

The process of pricing is the choice of pricing strategy that a business makes when setting prices for their products or services

Question 2

Types of pricing strategy

Answer 2

1. cost plus
2. price skimming
3. penetration
4. predatory
5. competitive
6. psychological

Question 3

Cost plus pricing

Answer 3

A cost-plus pricing strategy seeks to set a price for a product or service which covers the costs AND provides a good profit margin for the business

Question 4

Cost plus benefits and drawbacks

Answer 4

Protects the profit margins of the business Easiest method of pricing to apply
Easy to estimate profit levels
Disadvantages:

This method of pricing does not take into account the prices of the competition

Question 5

Skimming prices

Answer 5

The price is set high to start, this will create high profits and may be used to pay back high Research and Development (R&D) costs

Question 6

Skimming benefits and drawbacks

Answer 6

A high starting price can establish an upmarket image
For innovative products it can be a great way to harvest high profits from early buyers who want the latest gadget / item / product.
Drawbacks:

Cheaper imitations of the product may appear on the market too soon and take sales away from the product
Risky strategy as customers may be put off from buying due to the high price

Question 7

Competitive pricing

Answer 7

This means that customers will have to judge a product or service on “non-price” methods such as; quality of service or speed

Question 8

Competitive benefits and drawbacks

Answer 8

Useful in a market where one brand is dominant, the other brands would need to discount and offer lower prices encourage customers to buy
Drawbacks:

Pricing at the competitive rate may not cover all the costs of some smaller businesses which can’t get the same economies of scale as the larger ones

Question 9

Penetration pricing

Answer 9

This means setting prices really low on a new product to encourage sales and to persuade customers to try the product. Then when they like the product and have to keep buying it the business raises the price

Question 10

Penetration benefits and drawbacks

Answer 10

Works best with new products being launched to encourage consumers to try the product
Drawbacks:

Consumers may have bought anyway, even without the low start price
Expensive as it eats into profits by reducing sales revenue

Question 11

Predatory pricing

Answer 11

This is when aggressive price cutting is used to deter competitors or push them out of the market

Question 12

Predatory pricing benefits and drawbacks

Answer 12

The intention with predatory pricing is to drive competitors out of the market place or set a barrier to entry to discourage new entrants to the market
Drawbacks: Depends on the price elasticity of the product, if it is low then a lower price won’t make much difference to customer demand

Question 13

Psychological pricing

Answer 13

Thismeanspricingaproductat £1.99 rather than £2.00 to appear cheaper

Question 14

Psychological benefits and drawbacks

Answer 14

Ideal for products which want to project a premium image – the price might be part of the appeal.
Drawbacks: Psychological pricing strategy can be high risk, if comparable products are available for a lower price consumers could be tempted away

Question 15

Unique selling point

Answer 15

it is the unique details or features of the product that differentiates it from its rivals

Question 16

Price elasticity of demand

Answer 16

Homogenous products which have lots of substitutes will have to price close to competitors

Question 17

In elastic demand

Answer 17

Unique products which have few alternatives will be able to command premium prices as consumers will be unable to switch and therefore willing to pay the price