Pricing strategies 1.3.3

Question 1

What is price?

Answer 1

Is the amount is money that the customer has to pay to receive and good or service.

Question 2

Price strategies include

Answer 2

Cost plus

• price skimming
• penetration
• predatory
• competitive
• psychological
• discrimination

Question 3

Describe cost plus

Answer 3

A pricing method where a fixed percentage is added on top of the cost it takes to produce one unit of a product (unit cost). The resulting number is the selling price of the product.

Question 4

Describe price skimming

Answer 4

Charging a higher price on release of a product or when it is in the growth stage of the product life cycle. This technique is used to make back a significant portion of the funds that lead up to a product’s launch, e.g. R&D. Once this market has been ‘skimmed off’ the company will lower price.

Question 5

What is the risk of price skimming?

Answer 5

If one company releases a product at a high price at the same time that another new product enters the market at a similar price/lower, there could be a loss in potential sales.

Question 6

What is price penetration?

Answer 6

When a company charges an artificially low price for their product/service, sometimes used on the launch of a new product as a way to grab consumer interest and quickly gain market share.

Question 7

What is the risk of price penetration?

Answer 7

If other businesses decide to do the same, which can lead to a price war.

Question 8

What is predatory pricing?

Answer 8

• Prices are set low for a short period of time to force competitors out of the market.
• Prices are then put back to where they were previously or even higher.
• This strategy is used by dominant businesses, who can afford to make a loss in the short run, to force new entrants out of the market.

Question 9

Describe competitive pricing?

Answer 9

Prices are based on the prices charged by competitors, maybe the same or slightly lower, firms will try to compete on other aspects of the marketing mix.

Question 10

What is discrimination pricing?

Answer 10

Changing the prices between the time of day.

Question 11

What are price leaders?

Answer 11

• Firms that dominate a market with an existing product set the price and other firms in the market follow suit.
• It is illegal for firms to get together to set prices in order to increase the total value of the market.
• Smaller firms will sometimes look to the largest firm in the market to set the price and then follow this price lead. If the smaller firm were to lower their price below that set by the price leader it might start a price war that it has no hope of winning.

Question 12

What are price takers?

Answer 12

Smaller firms in the market who set their prices based on the market price. This might be the price set by the market leader or it might be in a very competitive market where firms sell similar products and customers find it hard to differentiate the product.

Question 13

What is psychological pricing?

Answer 13

(for existing products) used to make fine-tuned decisions on the price of charge, prices are set just below major psychological levels e.g. £9.99 instead of £10.

Question 14

What factors determine choice of pricing?

Answer 14

• Number of USP /differentiation
• Price elasticity of demand
• Level of competition in the business environment
• Strength of brand
• Stage in product life cycle
• Costs and needs to make a profit

Question 15

Describe how the number of USP affect the choice of pricing strategies.

Answer 15

• The more differentiated a product the greater the ability to charge higher prices as customers will pay more for the unique features of the product.
• A new product entering the market that is highly differentiated might use a strategy of price skimming.

Question 16

Describe how price elasticity of demand determines choice of pricing.

Answer 16

If customers are sensitive to changes in price i.e. the product is price elastic then a business might keep prices similar to competitors.

Question 17

Describe how the level of competition in the business environment will determine the choice of pricing.

Answer 17

If the market is dominated by a few large firms businesses will follow a strategy of competitive pricing.

Question 18

Describe how the strength of a brand determines the choice of pricing.

Answer 18

A strong brand adds value allowing a firm to charge a premium price.

Question 19

Describe how the stage in the product life cycle determines the choice of pricing.

Answer 19

During the growth stage of the life cycle of a product, there is high demand for the product and a lot of sales. You might need to work on getting your customers to choose your product over the competition. This could require more marketing and lowering your prices.

Question 20

Describe how costs and need to make and profit determines choices of pricing.

Answer 20

The business must guarantee a profit and to do this they need to consider the cost per unit.

Question 21

What are some changes in pricing strategies to reflect social trends?

Answer 21

• Online sales have led to the frequent use of dynamic pricing
• Price comparison websites have forced prices to be lower as people will generally take the lowest-priced option for the same thing