PRICING STRATEGIES

Question 1

COST PLUS PRICING

Answer 1

A percentage is added on to the cost of the making the product to give the selling price

Question 2

COMPETITOR PRICING

Answer 2

Prices are set based on the prices that rivals are charging. Prices are usually set lower to gain sales from rivals

Question 3

MARGINAL PRICING

Answer 3

The practice of setting the price based on the variable cost to produce an extra unit of output. This is used when the fixed costs have already been covered by the current output level

Question 4

CONTRIBUTION PRICING

Answer 4

Where the price charged is based on the variable costs of production. A price is set greater than the variable costs, so that the contribution is made towards the fixed costs

Question 5

PRICE SKIMMING

Answer 5

Prices are set high because customers are willing to pay more to own that product

Question 6

PENETRATION PRICING

Answer 6

When a business is new to a market, a price is set lower than their competitors. This is a a short term strategy to help break costumers loyalty from trusted brands

Question 7

PHYCOLOGICAL PRICING

Answer 7

A pricing method which triggers an emotional response rather than a rational one. The aim is to make customers believe it’s cheaper than it is

Question 8

COST PLUS ADVANTAGES

Answer 8

Straight forward and easy to calculate

Question 9

COST PLUS DISADVANTAGES

Answer 9

Ignores the concept of elasticity

Question 10

COMPETITOR PRICING ADVANTAGES

Answer 10

Advantageous in a market with many competitors as it prevents the loss of customers and market share based on price

Question 11

COMPETITOR PRICING DISADVANTAGES

Answer 11

Discourages businesses to focus on non-price differences which may help differentiate their product/service

Question 12

MARGINAL PRICING ADVANTAGES

Answer 12

Can be useful for moving excess capacity quickly (eg. Unsold plane seats)

Question 13

MARGINAL PRICING DISADVANTAGES

Answer 13

Customers who take advantage of marginal pricing are usually price sensitive and will not become loyal

Question 14

CONTRIBUTION PRICING ADVANTAGES

Answer 14

~Creates a focus on costs which should help a business to get to the break even point
~Is a useful pricing method for a business that wants to determine the price for a special/addition order

Question 15

CONTRIBUTION PRICING DISADVANTAGES

Answer 15

The prices set for each item is not necessarily competitive and doesn’t consider elasticity

Question 16

PRICE SKIMMING ADVANTAGES

Answer 16

A high price establishes the product as a “must have” and may indicate to the customers that it is high quality

Question 17

PRICE SKIMMING DISADVANTAGES

Answer 17

In the long term,competitors will enter the market and apply pricing pressure

Question 18

PENETRATION PRICING ADVANTAGES

Answer 18

Encourages word of mouth promotion

Question 19

PENETRATION PRICING DISADVANTAGES

Answer 19

Low initial prices can create a expectation of permanent low priced

Question 20

PHYCOLOGICAL PRICING ADVANTAGES

Answer 20

Customers may round the price down, making the price seem better value

Question 21

PHYCOLOGICAL PRICING DISADVANTAGES

Answer 21

Relies on the customer being emotional