Theme 1.3.3: Pricing Strategies

Question 1

What FOUR key factors need to be considered when deciding a pricing strategy?

Answer 1

. Costs
. Product Life Cycle
. Nature of Product - Luxury vs Necessity and differentiation
. Degree of Competition - Also links to differentiation

Question 2

What is Price Skimming?

Answer 2

Method where the business sets a relatively high initial price and lowers this over time. Usually done to try gain development costs or other costs incurred before the release of the product.

Question 3

Evaluation of Price Skimming

Answer 3

Good because:
. Maximises Revenue
. Attracts more customers - e.g. those who are willing to pay more when the product is new and also those who want to pay less as it flexes with the product life cycle

Bad because:
. Can cause slow growth - can give competitors more time to develop competing product
. Sales are not maximised meaning businesses are more vulnerable to having competitors enter or overtake them in the market

Question 4

In short: Why do businesses use price skimming?

Answer 4

. Cover Fixed Costs

. Maximise Revenue

Question 5

What is Price Penetration?

Answer 5

When a business tries to increase their market share by offering a lower initial price then raising it over time

Question 6

Evaluation of Price Penetration

Answer 6

Good because:
. Increases market share and dominance

Bad because:
. Lower average profits

Question 7

What are Loss Leaders?

Answer 7

Products or services sold to the business at a loss to them, in the hopes of attracting new customers by having them make further purchases

Question 8

What is Cost Plus Pricing?

Answer 8

Strategy where the business charges the customer based on what it costs to produce and adding a ‘mark-up’
e.g. Something may cost £10 to produce including all costs, seller then adds 20% and sells for this price, making it £12

Question 9

What is Competitive Pricing?

Answer 9

When a business sets its prices based on what others in that market are charging

Question 10

What are Pricing Strategies?

Answer 10

Ways in which a business may decide on the price of its product or service

Question 11

Evaluation of Competitive Pricing

Answer 11

Good because:
. Can be used effectively in competitive environments

Bad because:
. Risky due to the changes in pricing both up and down

Question 12

What is Premium Pricing?

Answer 12

The ability to charge higher prices whilst maintaining sales, usually prevalent in paces where there is no alternative e.g petrol stations and service stations

Question 13

Evaluation of Premium Pricing

Answer 13

Good because:
. Increases profitability

Bad because:
. Can only be used by certain products that are perceived as better

Question 14

What is Psychological Pricing?

Answer 14

Method of making prices seem more attractive and less expensive than they actually are e.g £9.99

Question 15

Evaluation of Psychological Pricing

Answer 15

Good because:
. Easy to implement
. Attracts customers looking for value

Bad because:
. Can not be used on high end products because it diminishes the perception of high quality

Question 16

What is predatory pricing?

Answer 16

Setting prices so low that other businesses are unable to compete and are forced out of the market

Question 17

Evaluation of Predatory Pricing

Answer 17

Good because:
. Very effective

Bad because:
. Incredibly illegal

Question 18

How does a USP and differentiation impact the choice of a pricing strategy?

Answer 18

. The more USP’s a product or service has, the more customers are willing to pay
. The more differentiated, the more it stands out from other products and competitors

Question 19

How does the price elasticity of demand impact the choice of a pricing strategy?

Answer 19

. Price elastic demand means you will be wary of raising price
. Price inelastic demand means you are more able to raise prices

Question 20

How does the level of competition impact the choice of a pricing strategy?

Answer 20

Less competition means more ability to raise price with little impact

Question 21

How does the strength of the brand impact the choice of a pricing strategy?

Answer 21

. Strong brand means premium pricing is more possible

. New or weak brand will need to be more competitive to fend off strong brands

Question 22

How does the stage in the product life cycle impact the choice of a pricing strategy?

Answer 22

. Likely to differ depending on what stage the product is at so it can maximise profits e.g your going to use price skimming at introduction rather than decline

Question 23

How do costs and the need to make a profit impact the choice of a pricing strategy?

Answer 23

. If profit is needed quickly its inappropriate to use penetration for example
. In the long term costs will need to be covered

Question 24

How has online selling impacted how businesses price their products?

Answer 24

Consumers are able to see more prices and products due to price comparison sites, much more choice and information is available than before.