The Marketing Mix: Price (Chapter 13).

Question 1

A business can adopt new pricing strategies for several reasons, including:

Answer 1

• To try to break into a new market.
• To try to increase its market share.
• To try to increase its profits.
• To make sure all its costs are covered and target profit is earned.

Question 2

What are the main methods of pricing:

Answer 2

• Cost-plus pricing.
• Competitive pricing.
• Penetration pricing.
• Price skimming.
• Promotional pricing.

Question 3

Define cost-plus pricing.

Answer 3

Cost-plus pricing is the cost of manufacturing the product plus a profit mark up.

Question 4

What are the benefits of cost-plus pricing?

Answer 4

• The method is easy to apply.
• Different profit mark up could be used in different markets.
• Each product earns a profit for the business.

Question 5

Define competitive pricing.

Answer 5

Competitive pricing is when the product is priced in line with or just below competitors’ prices to capture more of the market.

Question 6

What are the benefits of competitive pricing?

Answer 6

• Sales are likely to be high as the price is at a realistic level.
• Avoids price competition, which can reduce profits for all businesses in the industry.
• Often used when it is difficult for consumers to tell the difference between the products of different businesses.

Question 7

What are the limitations of competitive pricing?

Answer 7

• A higher quality product might need to be sold at a price above competitors to give higher quality.
• In order to decide what this price should be, detailed research would be needed to see what prices competitors are charging.
• If a business’s production costs are higher than those of competitors, then a competitive price could lead to losses.

Question 8

Define penetration pricing.

Answer 8

Penetration pricing is when the price is set lower than the competitor’s prices in order to be able to enter a new market.

Question 9

What are the benefits of penetration pricing?

Answer 9

• Often used for newly launched products to create an impact on customers.
• Market share should build up quickly.
• It should ensure that sales are made and the new product enters the market successfully.

Question 10

What are the limitations of penetration pricing?

Answer 10

• The product is sold at a low price and therefore the profit per unit may be low.
• Customers might get used to low prices and reject the product if the business starts to raise the price after the product’s early success.
• Might not be appropriate for a branded product with a reputation for quality.

Question 11

Define price skimming.

Answer 11

Price skimming is where a high price is set for a new product on the market.

Question 12

What are the benefits of price skimming?

Answer 12

• Skimming can help to establish the product as being of good quality.
• High research and development costs can be rapidly recouped.
• If the product is unique, a high price will lead to profits being made before competitors launch similar products.

Question 13

What are the limitations of price skimming?

Answer 13

• The high price may discourage some potential customers from buying it.
• The high price and high profitability may encourage more competitors enter the market.

Question 14

Define promotional pricing.

Answer 14

Promotional pricing is when a product is sold at very low price for a short period of time.

Question 15

What are the benefits of promotional pricing?

Answer 15

• It is useful for getting rid of unwanted inventory that will not sell.
• It can renew interest in a product if sales are falling.

Question 16

What are the limitation of promotional pricing?

Answer 16

• The revenue will be lower because the price of each item will be reduced.
• It might lead to a price competition with competitors.

Question 17

What are the consumer perceptions of a high-quality product if the price is very high?

Answer 17

A very high price for a high-quality product may mean that high-income customers wish to purchase it as a status symbol.

Question 18

What are the consumer perceptions if a product is set just below a whole number, for example, 99c?

Answer 18

If a price for a product is set just below a whole number this creates the impression of it being much cheaper.

Question 19

What are the consumer perceptions of when supermarkets charge low prices?

Answer 19

Supermarkets may charge low prices for products purchased on a regular basis which will give customers the impression of being given good value for money.

Question 20

What do repeated sales do?

Answer 20

Repeated sales are often made when the price reinforces consumers’ perceptions of the product - this may be its brand image when the price is set high.

Question 21

Define dynamic pricing.

Answer 21

Dynamic pricing is when businesses change product prices depending on the level of demand.

Question 22

Why would businesses use dynamic pricing?

Answer 22

Often customers can be spilt into two or more groups and are then charged different prices for basically the same product or service because they had different abilities or willingness to pay these prices or price sensitvity.

Question 23

Define price elastic demand.

Answer 23

Price elastic demand is where consumers are very sensitive to changes in price.

Question 24

Define price inelastic demand.

Answer 24

Price inelastic demand is where consumers are not sensitive to changes in price.

Question 25

How responsive the demand for a product is to changes in price is affected by how many close substitutes there are. Explain what is meant by this.

Answer 25

If there are many close substitutes for the product then, even if its price rises only a small percentage, consumers will respond by buying the substitute product.

Question 26

Give an example of price elastic demand.

Answer 26

If the price of a chocolate bar rose by 5 percent, some customers would buy alternative chocolate bars and sales might fall by 15 percent.

Question 27

Give an example of price inelastic demand.

Answer 27

If products such as electricity where they are not really any close substitutes increase in price by 15 percent it will not cause much of a fall in sales.

Question 28

Therefore, if the demand for the products of a business is elastic then it is ___ a ____ idea to raise prices unless there have been rising _____. If the price elasticity of demand is inelastic then businesses can ______ revenue by _______ prices.

Answer 28

Therefore, if the demand for the products of a business is elastic then it is not a good idea to raise prices unless there have been rising costs. If the price elasticity of demand is inelastic then businesses can increase revenue by increasing prices.