Pricing - P2

Question 1

How do business make a profit?

Answer 1

By selling goods at a price higher than its cost

Question 2

What is profit the result of?

Answer 2

Interations between cost, volume and price

Question 3

What does price elasticity of demand measure?

Answer 3

The change in demand as a result of a change in price

Question 4

What is elastic demand?

Answer 4

very responsive to changes in price. Total revenue increases when price is reduced, revenue decreases when price is increased

Question 5

What is inelastic demand?

Answer 5

Not very responsive to changes in price. Total revenue decreases when price is reduced, revenue increases when price is increased.

Question 6

What factors affect price elasticity?

Answer 6

1. Scope of the market
2. Information within the market
3. Availability of substitutes
4. Complementary products
5. Disposable income
6. Neccessities
7. Habit – Items consumers buy out of habit

Question 7

What is total cost plus pricing

Answer 7

adding a mark-up on total cost of product.

Question 8

What are the advantages of total cost plus pricing?

Answer 8

• Required profit will be made if budgeted sales volumes are achieved
• Cost-plus is quick and cheap to employ
• Useful to justifying selling prices to customers

Question 9

What are the disadvantages of total cost plus pricing?

Answer 9

• If based on normal volume, and actual volume turns out to be lower overheads will not be full recovered
• Takes no account of factors such as competitor activity
• Overlooks the need for flexibility in the different stages of a products life cycle

Question 10

What is marginal cost plus pricing?

Answer 10

Marginal cost is the same as variable cost

Question 11

What is the advantages of marginal cost plus pricing?

Answer 11

• Gives management the option of pricing below total cost
• Recognises the existence of scarce or limiting resources.

Question 12

What are the disadvantages of marginal cost plus pricing?

Answer 12

• Focused too much on internal costs rather than external conditions
• Fixed costs are ignored
• Company may find it hard to raise prices when margins are low

Question 13

What are the different types of market based pricing?

Answer 13

Premium Pricing
Market skimming
Penetration pricing
Price differentiation
Loss leader pricing
Discount Pricing

Question 14

What is premium pricing?

Answer 14

Pricing above competition on a permanent basis if product appears different and superior to competition

Question 15

What is market skimming?

Answer 15

high price is set for the product initially so that only those who are desperately keen on it will buy it

Question 16

What is penetration pricing?

Answer 16

Company sets a very low price for product initially

Question 17

What is price differentiation?

Answer 17

If market can be split into different segments it is possible to sell the same product to different customers at different prices

Question 18

What is loss leader pricing?

Answer 18

Product range consists of one or more main products and a series of related optional extras which the customer can add on.

Question 19

What is discount pricing?

Answer 19

Products priced lower than market norm, but are put forward as being of comparable quality