Pricing Strategies(1.3.3)

Question 1

What are pricing strategies?

Answer 1

method used by a business when deciding the price at which a product is sold for

Question 2

What is competitive pricing?

Answer 2

when a business sets a price similar to competitors selling similar/rival products
e.g Tesco(market leader) had to drastically change prices to math Aldi which contributed to their slight decrease in market share

Question 3

When is competitive pricing effective?

Answer 3

when a business is in a highly competitive market because they want to maintain their market share
as such they must monitor competitors prices and adjust according to remain competitive

Question 4

Advantages of competitive pricing

Answer 4

attracts price sensitive customers especially if the business is setting prices lower then competitors
market positioning, business can easily position themselves within the market which eliminates need for extensive market research saving time and money
quick response to market change allows businesses to adjust prices quickly in response to competitors which helps them stay responsive to customer expectations

Question 5

Disadvantages of competitive pricing

Answer 5

risk of reduced profit margin, by focusing on competitor prices a business may reduce profits to the point where profit margin are too low especially if it leads to a price war
difficulty in differentiation, in markets with similar products and competitive pricing it may be challenging for a business to stand out if cannot offer unique features or benefits

Question 6

What is penetration pricing?

Answer 6

setting a low price initially and accepting limited short-term profits/losses in order to build market share before switching to a more profitable and higher price
some firms may even offer free services prior to raising prices
e.g Disney+ launched and was priced less than Netflix causing their customer base to grow rapidly

Question 7

Advantages of penetration pricing

Answer 7

rapid market share growth, by offering low prices businesses can attract a large number of customers quickly allowing them to capture a significant portion of the market
builds customer loyalty, early adapters may develop loyalty to the brand especially if they perceive it as offering high value for a low price, this loyalty can be beneficial even if the prices rise gradually over time
high sales value, initial lower prices can lead to higher sales value which can help the business cover fixed costs faster and achieve economies of scale

Question 8

Disadvantages of penetration pricing

Answer 8

low profit margin, initial low price may result in lower profit margins which can be challenging to sustain especially if costs are high
risk of price wars, competitors may lower their prices in response leading to a price war that can erode profits for all firms in the market
customer expectations, customers may become accustomed to the low price making it difficult for the business to raise prices later without losing customers

Question 9

What is cost plus pricing?

Answer 9

method for setting the price of goods and services and is calculated by adding a markup percentage to the cost of the product

Question 10

Cost plus pricing equation

Answer 10

unit cost + (markup x unit cost) = price

Question 11

Cost plus pricing advantages

Answer 11

simplicity and easy to calculate, only require determining the cost and adding a set markup, simplicity makes it accessible
(usually) guaranteed profit margin, by including a specific markup over the cost the business ensures consistent profit margin assuming the product sells as expected

Question 12

Cost plus pricing disadvantages

Answer 12

ignores market demand, does not take into account customer demand or competitor pricing which could lead to prices that are too high resulting in low sales or too low resulting in missed revenue opportunities
inefficiency in cost control, since profit is tied directly to the costs there may be less incentive for the business to control or reduced costs potentially leading to inefficiencies

Question 13

What is psychological pricing?

Answer 13

tactics that are designed to appeal to a customers emotional response to prices over logical

Question 14

Psychological pricing advantages

Answer 14

increases sales appeal, prices that end in .99 or a slight increase in price for more value can make products seem more appealing triggering said emotional response so encouraging more purchases
competitive advantage, can help businesses remain competitive by positioning their prices as slightly more attractive than competitors round number prices

Question 15

Psychological pricing disadvantages

Answer 15

can be seen as dishonest, some consumers view i as a sales tactic which may reduce trust in the brand
not effective for all products, for high value or luxury items it can detract from the premium feel customers expect
difficult to implement B2B, may be seen as unprofessional where transparency and straight forwardness are valued

Question 16

What is predatory pricing?

Answer 16

setting a low price forcing rivals out of the market
illegal in the UK but difficult to prove

Question 17

Predatory pricing advantages

Answer 17

once other business or rival firms have been forced to close this enables the surviving firm to slowly raise prices again which will on average exceed the original price before the price drop enabling the surviving firm to make very large gains in profit margin
market dominance for firm setting prices
barriers for new entrants for firm setting prices

Question 18

Predatory pricing disadvantages

Answer 18

legal consequences, breaches the law and can result in severe penalties including large fines
monopoly causes product quality to decrease and prices to rise due to no competition negatively impacting customers and overall innovation

Question 19

What is price skimming?

Answer 19

setting a high price at the launch of a product to gain the money back from R&D and to take advantage of those wanting to be the first people to purchase

Question 20

Price skimming advantages

Answer 20

early adopters provide feedback on new products before a wife launch
can create high-end brand image and increased customer loyalty
potentially see higher returns on investment by maintaining interest for longer
provides higher up front sales figures to cover R&D costs

Question 21

Price skimming disadvantages

Answer 21

only works with an inelastic demand curve that doesn’t respond to price changes
doesn’t work if you have competitors creating similar technologies
quality must justify higher prices to be effective
early adopter might become turned off by price decrease after their initial purchase

Question 22

Changes in pricing to account for social trends

Answer 22

online sales
price comparison

Question 23

Online sales

Answer 23

offers consumers convenience, 24/7, accessible, rise of technology
firms can adjust their pricing strategies such as dynamic pricing whereby retailers adjust their price in real time concerning their brand value demand or competition
retailers may also offer different prices for online purchases compared to in store
incentive for customers to shop online, less fixed costs

Question 24

Price comparison sites

Answer 24

retailers have to adapt and remain competitive with sites such as compare the meerkat
prcing changed to reflect this by way of competitive pricing like Tesco and Aldi
may also use pricing algorithms to monitor the prices of their competitors and change them automatically

Question 25

Factors to consider when choosing a pricing strategy

Answer 25

number of USPs/amount of differentiation
price elasticity of demand
level of competition
strength of the brand
stages in the product life cycle
costs and the need to make a profit

Question 26

Number of USPs/amount of differentiation

Answer 26

products with many USPs and high differentiation can command higher prices
e.g. Dyson vacuum cleaners have unique features which allow the company to charge a premium price

Question 27

Price elasticity of demand

Answer 27

a business needs to consider PED when setting its prices
business should set lower prices if the product is price elastic
business should set higher prices if the product is price inelastic
e.g. if a business is in a highly competitive market with many substitutes lowering prices will increase revenue

Question 28

Level of competition

Answer 28

in highly competitive markets businesses may need to set their prices low to remain competitive
in less competitive markets businesses may be able to set higher prices
e.g. the budget airline industry is highly competitive and airlines keep their prices low to increase demand

Question 29

Strength of the brand

Answer 29

a strong brand with a loyal customer base can command higher prices
e.g. Nikes strong brand allows it to charge premium prices for its athletic shoes and apparel

Question 30

Stage in the product life cycle

Answer 30

in the introduction stage prices may be set lower to attract customers and build market share
in the growth stage prices can increase as demand for the product increases
in the maturity stage prices may need to be lowered again

Question 31

Costs and the need to make a profit

Answer 31

prices must cover the cost of production and provide a reasonable profit margin
e.g. a restaurant needs to consider the cost of ingredients labour rent and other expenses when setting the menu price