Pricing Strategies (paper 3)

Question 1

What are the pricing strategies? (6)

Answer 1

• Cost plus pricing.
• Price skimming.
• Penetration pricing
• Predatory pricing
• Competitive pricing
• Psychological pricing

Question 2

Cost plus pricing (2)

Answer 2

• Involves adding a mark-up to unit costs.

- Common with retailers.

Question 3

Disadvantage of cost plus pricing

Answer 3

Difficult to identify precisely all the costs associated with the production of a particular product.

Question 4

Price skimming (2)

Answer 4

• Charging high prices at first, and reducing it over time.

- Strategy is to generate high levels of revenue with a new product before competitiors arrive.

Question 5

Adv of price skimming

Answer 5

People are prepared to pay high prices for goods like phones- more revenue.

Question 6

Disadv of price skimming

Answer 6

Can only be used if demand is price elastic.

Question 7

What is penetration pricing

Answer 7

Charging a low price for a limited time period

Question 8

Adv of penetration pricing

Answer 8

Can target middle/low income consumer groups.

Question 9

Disadv of penetration pricing

Answer 9

Must resist extending such offers for too long.

Question 10

Predatory pricing

Answer 10

Charging a cery low price for a period of time until one or more rivals leave the market.

Question 11

Adv of predatory pricing

Answer 11

Less competitors.

Question 12

Disadv of predatory pricing

Answer 12

Quality may suffer

Question 13

Competitive pricing

Answer 13

Closely looking at prices that rivals are setting.

Question 14

Adv of competitive pricing

Answer 14

It’s considered a safe pricing strategy- a price war is likely to be avoided.

Question 15

Psychological pricing

Answer 15

• Charging £99.99 instead of £100- ‘tricked’ into thinking it’s much cheaper.
• This approach targets consumers looking for bargains.

Question 16

Factors that determine the most appropriate pricing strategy for a particular situation?

Answer 16

• differentiation and USP (can charge higher prices).
• PED
• Amount of competition (little comp. = can charge higher prices, vice versa).
• Strength of the brand (strong brand= can charge higher prices).
• Stage in the product life cycle
• Costs and the need to make a profit (price depends on need to make profit).

Question 17

Product life cycle

Answer 17

Product development 
Introduction
Growth 
Maturity 
Decline

Question 18

Define pricing strategy

Answer 18

Methods used by a business when deciding what to charge for its products.

Question 19

Changes in pricing to reflect social trends:

Answer 19

• Dynamic pricing- fares may depend on the day of the week, time of day, etc. E.g. hotels, airlines.
• Auction sites- sells goods to the highest bidder. This allows sellers to get the best possible price for goods.
• Personalised pricing- involves the use of data (purchase history) to set a unique price for that shopper. Adv- can charge higher prices to those customers who are prepared to pay more.
• Subscription pricing- charging customers a regular monthly fee for the use of a service or access to a specific product range. E.g. Spotify and Netflix use this. Adv: customers tied in to long term agreements with business —> improves cash flow.
• Price comparison sites- they compare prices from a range of suppliers. E.g. trivago compares hotel prices. This is useful for consumers as they identify the cheapest deals available.