Pricing strategies

Question 1

Pricing strategy

Answer 1

The approach the business takes when setting the price of its goods

Question 2

Price skimming

Answer 2

A business sets a high price for its product when it’s first introduced to the market.
-Effective when the brand is established and there is high demand for the product e.g apple iPhones
+High price pays off development and marketing costs quickly
+Creates a premium image
-Early buyers may feel they have been taken advantage of when prices drop

Question 3

Cost plus pricing

Answer 3

The business adds a markup from the cost of production.
-The markup gives the business its desired profit
-Used by manufacturers of standardised goods e.g washing machines
+Simple to calculate
+price increase can be justified when cost rise
-requires an estimate of costs
-Less incentives to cut costs

Question 4

Penetration pricing

Answer 4

The business sets a low price for a new product
-Good if the business wants to quickly get market share
-Once they have enough customers they can start increasing the price
+Can catch competition off-guard
+Forces the business to focus on minimising costs
-It can be hard to increase prices
-May lead to retaliation from established competitors

Question 5

Predatory pricing

Answer 5

The business sets prices so low that it drives competitors out of the market.

+Reduces competition
+Creates a barrier of entry to the market
-Not a suitable long-term business
-It’s illegal but hard to prove

Question 6

Competitive Pricing

Answer 6

The business sets there prices based on competitor’s prices.
-Effective when in a highly competitive market and wants to maintain its market share
-Adjust price accordingly to remain competitive

+Competotrs dont have a price adavantage
+Maintain market share
-Business may have different costs
-What is competitors have set bad prices

Question 7

Psychological pricing

Answer 7

Takes into account customer’s emotions, beliefs, and attitudes toward the product
-Sets price at £9.99 instead of £10 as it is perceived as better value

Question 8

Factors that allow a business to use cost plus pricing

Answer 8

-Highly differentiated products
-Strong brands
-Business with low PED, can increase prices with low impact on sales

Question 9

Factors that make a business use competitive pricing

Answer 9

-Very competitive markets e.g supermarket market
-Business with high PED