Pricing strategies

Question 1

Define pricing.

Answer 1

The process of pricing is the choice of pricing strategy that a business makes when setting prices for their products or services.

Question 2

What is pricing strategy?

Answer 2

Once a product has been developed a price will then need to be decided upon.

A strategy is the medium to long term plan of the business and the pricing will need to fit with the business objectives.

The pricing strategy will depend on many factors including the product or service itself, competitors in the market and the aims and objectives of the business.

Question 3

List the different types of pricing strategies.

Answer 3

Cost plus
Price skimming
Penetration
Predatory 
Competitive 
Psychological

Question 4

Explain cost cost-plus pricing stragegy.

Answer 4

The total cost of the products are worked out then a fixed percentage is added on top.

Question 5

Evaluate cost-plus strategy.

Answer 5

+ Protects the profit margins of the business
+ Easiest method of pricing

• does not take competition into account
• other shops may offer the same for a lower price

Question 6

Explain skimming pricing strategy.

Answer 6

A skimming price strategy is used when launching a new product. The price is set high to start which creates high profits and may be used to pay back high research and design costs. This is usually used for technological or very innovative products which have little competition.

As competitors eventually enter the market the price is then reduced.

Question 7

Evaluate skimming pricing strategy.

Answer 7

+ A high starting price can establish an upmarket image

+ For innovative profits it is a good way to harvest early profits from early buyers who are prepared to pay a premium

• cheaper imitations may appear too soon on the market and take sales away from the product.

Question 8

Explain competitive pricing strategy.

Answer 8

Some products or services are priced in line with competitors. This means that customers will have to judge a product or service on non-price methods such as quality of service or speed.

This is usually used where products in a market are all very similar.

Question 9

Evaluate competitive pricing strategy.

Answer 9

+ Useful in a market where one brand is dominant, the other brands would need to discount and offer lower prices to encourage customers.

• pricing at the competitive rate may not cover all the costs of some smaller businesses which can’t get the same economies of scale as the larger ones.

Question 10

Explain penetration pricing.

Answer 10

Setting prices really low on a new product to encourage sales and encourage the customer to try the product. Then, once they like it and want to keep buying it, the business raises the price.

Low prices should gain the business more market share (market penetration)

Question 11

Evaluate penetration pricing strategy.

Answer 11

+ Works best with new products being launched to encourage consumers to try the product

• Consumers may have brought the product anyway
• Expensive as it eats into profits by reducing sales revenue

Question 12

Explain predatory pricing.

Answer 12

In oligopolies or monopolies existing businesses may hold off a new entrant by lowering the prices so that any competitor cannot make a profit. Essentially using aggressive price cutting to deter or push competition out of the market.

Depends on the strength of the brand, whether consumers will switch or stay loyal, and the financial strength of the firm and if they can afford to cut prices.

Question 13

Evaluate predatory pricing.

Answer 13

+ Can drive away competitors and new entrants

• depends on the price elasticity of the product- if it is low then a lower price won’t make a difference to consumer demand

Question 14

Explain psychological pricing.

Answer 14

This means pricing a product at 1.99 instead of 2 pounds to appear cheaper.

Some businesses carefully consider pricing as it is often an indicator of quality- high value or status items like luxury cars avoid pricing just below but instead may price higher to meet customer expectations.

Question 15

Evaluate psychological pricing strategy.

Answer 15

+ ideal for products that want to project a premium image- price may be part of the appeal

• psychological pricing can be high risk, if similar products are available for a lower price consumers could be tempted away

Question 16

List the different factors that determine pricing strategy.

Answer 16

USP/ amount of differentiation
PED
competition levels
brand strength
stage in product life cycle
cost needed to make a profit

Question 17

Explain the impact of USPs on pricing.

Answer 17

A USP is a unique selling point of the product that differentiates from rivals eg a special chocolate bar flavour. A good USP allows brands to price higher.

Question 18

Explain the impact of PED on pricing.

Answer 18

Homogenous products which have lots of substitutes will have an elastic PED and so have to price close to competitors- too high and consumers will switch, too low and consumers may perceive the product as inferior

Unique products with few alternatives will have an inelastic PED and be able to command premium prices as consumers will be unable to switch and therefore willing to pay the price

Question 19

Explain the impact of levels of competition on pricing.

Answer 19

A change in the price of one business may result in the change of all the others. The availability of substitute products will affect business pricing decisions. If a business wants to establish and maintain loyal customers it will need to match or have similar prices to competitors. Some stores offer a price match

Question 20

Explain the impact of the strength of a brand on pricing.

Answer 20

A brand helps define a business in the eyes of a consumer. A strong brand can charge higher prices because consumers will pay the higher price for strong brands.

In 84 % of sales brand is the largest influence on price

Question 21

Name the different stages in the product life cycle.

Answer 21

Development
Launch
Growth 
Maturity 
Decline

Question 22

Explain what happens to product pricing in the launch phase.

Answer 22

Products in the launch phase may use skimming if the product is unique and the business wants to claw back the r&D costs

Question 23

Explain what happens to product pricing in the growth or maturity phase.

Answer 23

Products may price closer to competitors after new imitations enter the market place.

Question 24

Explain what happens to product pricing in the maturity and decline phase.

Answer 24

Products may be priced lower to clear stocks before a new product is introduced.

Question 25

Explain the impact of cost and the need to make a profit on pricing.

Answer 25

The costs of a product all need to be taken into account when price is decided. eg. raw materials, promotion and advertising, product development and design

A business will want to break-even and make a profit.

Question 26

Explain the impact of online sales on pricing.

Answer 26

Websites can offer lower prices than brick and mortar shops because they don’t have the overheads, rent and costs of running a store.

Many customers look at the goods in a store then buy them online at a cheaper price.

This means online retailers need to have dynamic pricing which is constantly updated based on competitors.

Question 27

Explain the impact of price comparison sites on pricing.

Answer 27

Customers are now able to shop around and use these sites to compare prices of insurance, where they previously would have had phone companies to get quotes which is time consuming and expensive. This works by heavily advertising and the companies pay to be featured in a list.