pricing strategies

Question 1

describe cost plus

Answer 1

The business calculates the unit cost of a product and then adds a percentage mark-up for profit, e.g. it costs PC World £300 to purchase a laptop which they then mark up by 50% and sell to the customer for £450.

Question 2

describe competitive

Answer 2

The price of a product is set similar to the competitors, e.g. fuel prices.

Question 3

describe skimming

Answer 3

The price is set high to begin with and lowers over time, e.g. with electronics, such as the iPad, PS4, etc.

Question 4

describe penetration

Answer 4

The price is set low to begin with and increases over time, e.g. ‘trial prices’ on new chocolate bars.

Question 5

describe price discrimination

Answer 5

Prices are altered depending on a discriminating factor, e.g. different prices are often charged in the transport industries depending on age, such as a child price, adult price and senior citizen price.

Question 6

describe destoryer/predatory

Answer 6

The price is deliberately set extremely low for a period of time to force out competitors.

Question 7

describe loss leaders

Answer 7

A promotional price of one or more products is set unprofitably low to entice customers in to buy other products.

Question 8

describe psychological

Answer 8

the price is set just below the next rounded number (eg £49.99 instead of £50)

Question 9

adv of cost plus

Answer 9

A quick and easy way of setting the selling price.

Ensures that total costs are covered and a profit is generated.

Question 10

adv of competitive

Answer 10

Avoids a price war.

Encourages competition, which improves the market as a whole.

Question 11

adv of skimming

Answer 11

Sufficient ‘hype’ around a new product enables higher prices to be charged, which can increase profits.

Lack of competition also allows maximum prices to be charged.

Question 12

adv of penetration

Answer 12

Encourages customers to try a new product.

The business hopes to gain repeat custom once the price rises.

Question 13

adv of price discrimination

Answer 13

Ensures products appeal to different market segments.

Allows for high profit margins on some price brackets.

Question 14

adv of destroyer/predatory

Answer 14

Competitors are forced out of the market, then prices can increase again.

Increases market share.

Question 15

adv of loss leaders

Answer 15

Creates greater footfall, i.e. brings customers to the business.

Hopefully, customers will buy normal priced products while buying loss leaders.

Encourages repeat purchases.

Question 16

adv of psychological

Answer 16

makes the customer think the product is much cheaper than it actually is

products fit price bands that customers have in mind

Question 17

disadv of cost plus

Answer 17

Doesn’t cover indirect costs, e.g. other expenses such as rent.

Doesn’t take external factors into account, e.g. increasing prices during boom periods to maximise profits.

Question 18

disadv of competitive

Answer 18

Other elements of the marketing mix must be better than the competition’s to ensure sales.

Question 19

disadv of skimming

Answer 19

High initial prices can put off some customers.

Technique results in low initial sales numbers.

Question 20

disadv of penetration

Answer 20

Very little profit can be generated during the initial low price period.

Could result in a price war if competitors set lower prices too.

Question 21

disadv of price discrimination

Answer 21

Harder to budget for sales revenue in advance.

Loss in potential revenue from selling at a cheaper price, e.g. a child taking a seat at a football match that could have attracted the full price from an adult.

Question 22

disadv of destroyer/predatory

Answer 22

Can only be used by larger companies that can afford to make losses while prices are low.

This illegal practice could breach the CMA’s anti-competition regulations

Question 23

disadv of loss leaders

Answer 23

There is a risk that some customers will only buy the loss leaders, impacting on profits.

Question 24

disadv of psychological

Answer 24

calculating the total money owed or change can be difficult

some customers may ignore the attempt of making the product seem cheaper so the rest of the marketing mix would have to convince them to purchase

Question 25

factor affecting pricing strategy - target market for the product

Answer 25

mass-market products need to be priced in a way that will appeal to most income segments, whereas exclusive products aimed at wealthy segments can be priced higher

Question 26

factor affecting pricing strategy - demand for the product

Answer 26

if the demand for a product is high, then the business can maximise profits by setting the price high; once demand drops, it can lower the price to encourage sales

Question 27

factor affecting pricing strategy - objectives of the business

Answer 27

if the objective is to maximise sales, a lower price might be offered. if the objective is to maximise profits, a higher price may be set

Question 28

factor affecting pricing strategy - external factors

Answer 28

prices should be lowered during a recession to encourage sales or increased during boom periods to maximise profits. similarly, prices may have to be lowered to respond to the price offered by competitors

Question 29

factor affecting pricing strategy - cost of the product

Answer 29

any pricing strategy should take into account the cost to produce the product (unit cost) as well as other costs that need to be covered, such as rent. for this reason, loss leaders, and destroyer pricing should be used sparingly and for short periods

Question 30

describe premium/high pricing

Answer 30

when a business sets its pricing higher than its competitors in order to create an image of quality

Question 31

describe low pricing

Answer 31

when a business set its prices lower than competitors in order to attract customers and increases market share