3.3.2 Price

Question 1

What is price?

Answer 1

Price is the amount of money producers are willing to sell or consumer are willing to buy the product for.

Question 2

What are examples of the different methods of pricing?

Answer 2

• market skimming
• Penetration pricing
• Competitive pricing
• Cost plus pricing
• Loss leader pricing/promotional pricing

Question 3

What is market skimming?

Answer 3

Setting a high price for a new product that is unique or very different from other products on the market.

Question 4

What are the advantages of market skimming?

Answer 4

• Profit earned is very high
• Helps recover/compensate research and development costs

Question 5

What are the disadvantages of market skimming?

Answer 5

• It may backfire if competitors produce similar products at a lower price

Question 6

What is penetration pricing?

Answer 6

Setting a very low price to attract customers to buy a new product

Question 7

What are the advantages of penetration pricing?

Answer 7

• Attracts customers more quickly
• Can increase market share quickly

Question 8

What are the disadvantages of penetration pricing?

Answer 8

• Low revenue due to lower prices
• Cannot recover development costs quickly

Question 9

What is competitive pricing?

Answer 9

Setting a price similar to that of competitors’ products which are already available in the market

Question 10

What are the advantages of competitive pricing?

Answer 10

• Business can compete on other matters such as service and quality

Question 11

What are the disadvantages of competitive pricing?

Answer 11

• Still need to find ways of competing to attract sales.

Question 12

What is cost plus pricing?

Answer 12

Setting price by adding a fixed amount to the cost of making the product

Question 13

What are the advantages of cost plus pricing?

Answer 13

• Quick and easy to work out the price
• Makes sure that the price covers all of the costs

Question 14

What are the disadvantages of cost plus pricing?

Answer 14

• Price might be set higher than competitors or more than customers are willing to pay, which reduces sales and profits

Question 15

What is Loss leader pricing/ promotional pricing?

Answer 15

Setting the price of a few products at below cost to attract customers into the shop in the hope that they will buy other products as well

Question 16

What are the advantages of loss leader pricing/promotional pricing?

Answer 16

• Helps to sell off unwanted stock before it becomes out of date
• A good way of increasing short term sales and market share

Question 17

What are the disadvantages of loss leader pricing/promotional pricing?

Answer 17

• Revenue on each item is lower so profits may also be lower

Question 18

What pricing method should you use form existing and new products?

Answer 18

If it’s new, then price skimming or penetration pricing will be most suitable. If it’s an existing product, competitive pricing or promotional pricing will be appropriate.

Question 19

What pricing method should you for unique products?

Answer 19

If yes, then price skimming will be beneficial, otherwise competitive or promotional pricing.

Question 20

What pricing method should you use if there is a lot of competition in the market?

Answer 20

If yes, competitive pricing will need to be used.

Question 21

What pricing method should you use if the business has a well-known brand image?

Answer 21

If yes, price skimming will be highly successful.

Question 22

What pricing method should you use if the business has high/low costs?

Answer 22

If there are high costs, costs plus pricing will be needed to cover the costs. If costs are low, market penetration and promotional pricing will be appropriate.

Question 23

What pricing method should you use based on the marketing objectives?

Answer 23

If the business objective is to quickly gain a market share and customer base, then penetration pricing could be used. If the objective is to simply maintain sales, competitive pricing will be appropriate.

Question 24

What is PED

Answer 24

The PED of a product refers to the responsiveness of the quantity demanded for it to changes in its price.

PED (of a product) = % change in quantity demanded / % change in price

Question 25

What is price elastic?

Answer 25

When the PED is >1, that is there is a higher % change in demand in response to a change in price, the PED is said to be elastic.

Question 26

What is price inelastic?

Answer 26

When the PED is <1, that is there is a lower % change in demand in response to a change in price, the PED is said to be inelastic.

Question 27

What should the business do if the product has an elastic demand?

Answer 27

If the product is found to have an elastic demand, the producer can lower prices to increase profitability. The law of demand states that a fall in price increases the demand. And since it is an elastic product (change in demand is higher than change in price), the demand of the product will increase highly. The producers get more profit.

Question 28

What should the business do if the product has an inelastic demand?

Answer 28

If the product is found to have an inelastic demand, the producer can raise prices to increase profitability. Since quantity demanded wouldn’t fall much as it is inelastic, the high prices will make way for higher revenue and thus higher profits.