Pricing

Question 1

Price

Answer 1

Amount that customers pay for having or using a product or service.
In order to meet their marketing objectives, businesses have to set the appropriate pricing strategies.

Question 2

Cost-Plus (Basic Strategy)

Answer 2

It consists of adding a markup to the average cost. The sum is the final price.
A markup is a percentage from the average cost that is added to it.
Use: Small businesses/markets, resellers and service based businesses

Question 3

Pros of Cost Plus

Answer 3

• Simple and Quick form
• Ensures that all costs are covered and profits as well

Question 4

Cons of Cost Plus

Answer 4

• Doesn’t take into account competitor’s prices
• Doesn’t take into account customer value and market needs

Question 5

Penetration Pricing

Answer 5

Using initially low prices to attract customers and increase the market share. Once the market share is big enough the prices then rise.

Use for:
Increase brand awareness
Mass marketing
New product in existing market or vice versa
New player in the market
High demand is expected

Question 6

Pros of Penetration Pricing

Answer 6

• High sales volume and market share
• Increase brand awareness
• Higher sales → Reduced costs of production → Higher stock turnover

Question 7

Cons of Penetration Pricing

Answer 7

• Higher sales don’t mean higher profits
• Only works in low price sensitive markets, because once princes increase the business will lose customers.
• Brand value at risk→ Low prices linked to poor quality

Question 8

Loss Leader Pricing

Answer 8

Selling the product at a loss, below its average cost. Losing money. In hopes that it will attract customers and those will hopefully purchase other products that have a higher price, thus compensating the lost money.
Used in supermarkets.

Question 9

Pros of Loss Leader Pricing

Answer 9

• Attract customers
• Promotional strategy → Makes customers switch brands and leave your competitor.

Question 10

Cons of Loss Leader Pricing

Answer 10

• It is risky, it is all based on probability.
• Can be considered an unfair practice.

Question 11

Predatory Pricing (Dangerous Strategy, can lead to price wars)

Answer 11

Consists of initially setting really low prices to kick any competitors off the market. After there are no competitors left the prices rise so they recoup profits. Potential monopoly.

Question 12

Pros of Predatory Pricing

Answer 12

• No competitors, high entry barrier
• Dominant position

Question 13

Cons of Predatory Pricing

Answer 13

• Unethical
• Illegal in some countries
• Hard to sustain in the long term. Profitability at risk.

Question 14

Premium Prices & when are they used

Answer 14

Setting really high initial prices. To make the product seem superior to its competitors. Strategy used in high quality products. The high price is sustained for a long time unlike Price Skimming.
Use when:
Building a luxury brand/image
When the business has competitive advantages

Question 15

Pros of Premium Prices

Answer 15

• Seen as a status symbol, people want to show it off → Free advertisement
• High profit margins
• Increased brand value
• Firms can focus on improving the product’s quality → Because they don’t try to buy it for less because they are convinced of the price.

Question 16

Cons of Premium Prices

Answer 16

• High initial marketing costs to raise brand awareness
• Reduced audience. Little market.
• Can’t be applied to products with very stiff competition.

Question 17

Dynamic Pricing

Answer 17

Price changes depending on the circumstances. Prices are continuously adjusting as a response to changes in demand and supply.
This strategy needs to take into account competition and demand+supply.
Examples: Uber, Hotels and Airlines.

Question 18

Pros of Dynamic Pricing

Answer 18

• High Profits and sales → Flexible, can maximize profits in a given period.
• Easier to manage stock → e.g Discounts for overstocked products and higher prices for high demand.
• Can easily adapt to customer’s preferences → beat competition.

Question 19

Cons of Dynamic Prcing

Answer 19

• Customer dissatisfaction → Higher prices for same product
• Can’t be used in all industries
• Customers can beat the system and use cheaper sellers when more convenient.
• Can lead to significant fluctuations in the market.

Question 20

Competitive Pricing

Answer 20

Price is set according to competitor’s prices. It is a market oriented approach. It requires market research and analysis.

Question 21

Pros of Competitive Pricing

Answer 21

• Ensures sales
• Customer loyalty and a stable customer base because they know they are paying fair prices.
• Low-risk strategy

Question 22

Cons of Competitive Pricing

Answer 22

• Brand might not stand out → Customers see products with the same prices as the same.
• Not sustainable in the long term because competitors might manipulate prices in their own favor, or might focus on other market segments, or their pricing strategy might change etc.
• May make the business miss out on other important factors such as covering production and overhead costs → Future lower revenue.

Question 23

Price Elasticity of Demand

Answer 23

The extent to which demand is affected by price.

Question 24

PED Formula

Answer 24

%change in quantity demanded / %change in price

Question 25

When PED 0-1

Answer 25

Inelastic. Change in price doesn’t affect its demand. This market consumers find it difficult to switch away from the product. Usually products that are a necessity such as insulin.

Question 26

When PED 1

Answer 26

Unit elastic. %Change in D = %Change in P

Question 27

When PED 1>

Answer 27

Elastic. Small change in price leads to a big change in demand. In this market products have lots of substitutes.