Pricing to Compete

Question 1

What are the 6 pricing strategies?

Answer 1

Penetration
Skimming
Cost plus
Psycological
Competetive
Predatory/destroyer

Question 2

What determines which pricing strategy is used?

Answer 2

Differentiation
PED
Amount of competition
Strength of brand
Stage in product life cycle
Cost, and need to make a profit

Question 3

What is penetration pricing?

Answer 3

When a lower introductory price than competition is set to entice customers. Once a loyal customer base is established, prices are increased to a more profitable level.

Question 4

When would penetration pricing be used?

Answer 4

By businesses to break into new markets or increase existing market share.

Question 5

What factors influence how much the prices increase in penetration pricing?

Answer 5

Strength of brand loyalty.
Reaction of competitors.

Question 6

What is an example of a company using penetration pricing?

Answer 6

Phone and Pay TV services offer low prices for an initial rate then prices rise to a ‘standard rate’

Question 7

What do companies hope is the outcome of using penetration pricing?

Answer 7

They hope brand loyalty and inertia will keep customers once the introductory period finishes.

Question 8

What are the negatives of using penetration pricing?

Answer 8

Risk of losing customers once prices rise.
Risk of profits never rising due to ^.
May cause competitors to lower prices which restricts from increasing prices.

Question 9

What is price skimming?

Answer 9

When businesses charge a high initial price for a product.

Question 10

Why is price skimming used?

Answer 10

In order to get as much profit as possible whilst the product is still relatively unique.

Question 11

When would price skimming be used?

Answer 11

When products are in the introductory phase in the life cycle. Demand will be high and people will be willing to pay a high price for the product.

Question 12

What is an ‘early adopter’?

Answer 12

The people willing to pay a high price for a highly demanded product in the introductory stage of the product life cycle.

Question 13

Why is price skimming only available for a short amount of time?

Answer 13

Rival businesses will develop competing products which will force down prices as sales drop.

Question 14

Which market is price skimming most ademant in?

Answer 14

Electronics, and pharmeceutacals especially for well-known businesses. They often keep skimming new ‘improvements’ as ‘better’ versions of their product i.e iPhones.

Question 15

What are the negatives of using price skimming?

Answer 15

Early adopters may be turned away by price reductions following the initial purchase.
Difficult to implement when competetors release similar products soon after the release of the initial product.

Question 16

What is competetive pricing?

Answer 16

Setting prices very to close to that of close competition.

Question 17

When is competitive pricing used?

Answer 17

In highly competitive markets with many substitutes.

Question 18

What will a rise in prices when using competitive pricing do?

Answer 18

Decrease sales.

Question 19

How can businesses increase profits whilst using competitive pricing?

Answer 19

Focus on operating efficiently to cut costs.
Create a USP to differentiate products in order to increase attractiveness.

Question 20

How do businesses using competitive pricing make their profits?

Answer 20

By working on low profit margins but relying on high volumes of sales.

Question 21

What has Tesco, a competitive pricing user, been forced to do regarding their pricing?

Answer 21

Forced into price matching due to a fall in market share.

Question 22

What are the negatives of using competitive pricing?

Answer 22

Risk of selling at a loss.
Risk of failure upon set up due to competition and a lack of loyal customer base.
Products may be low in quality in order to retain profit; this can lose customers.

Question 23

What is cost-plus pricing?

Answer 23

Pricing based off of an assessment of costs, topped up with a percentage for profit.

Question 24

What is the benefit of using cost-plus pricing?

Answer 24

It ensures that each product sold yields a profit.

Question 25

What market is cost-plus pricing most often used in?

Answer 25

Retail such as groceries and clothing.

Question 26

What are the negatives of using cost-plus pricing?

Answer 26

Pricing a mark-up can be disastrous if competitors prices aren’t taken into account.
If sales are low at the chosen price then a loss may be made.

Question 27

What is predatory/destroyer pricing?

Answer 27

Setting low prices, even sometimes at a loss, before increasing prices to a profitable level.

Question 28

Why is predatory/destroyed pricing used?

Answer 28

In order to eradicate competition or reduce its market share.

Question 29

If making a loss, how can a business sustain to use predatory/destroyer pricing?

Answer 29

By making profit on other products that inherently covers the cost of the loss on the other product.

Question 30

Which law makes predatory/destroyer pricing illegal?

Answer 30

Competition Law

Question 31

Why is it hard to press charges on people using predatory/destroyer pricing?

Answer 31

When accused, firms just claim they are being very competitive and if costs are covered by other profits, it is hard to prove it is happening.

Question 32

What are the negatives of predatory/destroyer pricing?

Answer 32

If costs aren’t covered by other products, losses can be made and firms may fail.
Small profit margins may make it difficult to expand or grow as a business whilst competing.