Podcast
Questions and Answers
A company that manufactures custom-made furniture calculates the cost of materials at $500, labor at $300, and overhead at $200 per unit. If they apply a 25% markup, what will be the selling price per unit using cost-plus pricing?
A company that manufactures custom-made furniture calculates the cost of materials at $500, labor at $300, and overhead at $200 per unit. If they apply a 25% markup, what will be the selling price per unit using cost-plus pricing?
- $1,125
- $1,375
- $1,000
- $1,250 (correct)
A new tech gadget is launched with a high initial price. As competitors enter the market with similar products, the company gradually lowers the price. Which pricing strategy does this BEST describe?
A new tech gadget is launched with a high initial price. As competitors enter the market with similar products, the company gradually lowers the price. Which pricing strategy does this BEST describe?
- Penetration pricing
- Competitive pricing
- Cost-plus pricing
- Price skimming (correct)
A large supermarket chain drastically reduces the price of bread below cost to attract customers and eliminate smaller bakeries. What type of pricing strategy is the supermarket chain employing?
A large supermarket chain drastically reduces the price of bread below cost to attract customers and eliminate smaller bakeries. What type of pricing strategy is the supermarket chain employing?
- Competitive pricing
- Penetration pricing
- Predatory pricing (correct)
- Cost-plus pricing
A software company releases a new antivirus program at a very low price to quickly gain market share and encourage users to switch from existing solutions. Which pricing strategy is the company utilizing?
A software company releases a new antivirus program at a very low price to quickly gain market share and encourage users to switch from existing solutions. Which pricing strategy is the company utilizing?
A small business owner determines the price of their handcrafted goods by adding together the cost of materials, labor, and a percentage for overhead, then adding a fixed profit margin. What pricing strategy are they using?
A small business owner determines the price of their handcrafted goods by adding together the cost of materials, labor, and a percentage for overhead, then adding a fixed profit margin. What pricing strategy are they using?
In a market where many vendors sell similar products with only slight differentiation, a business sets its prices to match the average price charged by its competitors. What pricing strategy is BEST exemplified here?
In a market where many vendors sell similar products with only slight differentiation, a business sets its prices to match the average price charged by its competitors. What pricing strategy is BEST exemplified here?
Which of the following factors is LEAST likely to influence a business's choice of pricing strategy?
Which of the following factors is LEAST likely to influence a business's choice of pricing strategy?
A company initially prices its new line of luxury watches very high, targeting affluent customers who are willing to pay a premium for the latest technology and status symbol. What pricing strategy are they implementing?
A company initially prices its new line of luxury watches very high, targeting affluent customers who are willing to pay a premium for the latest technology and status symbol. What pricing strategy are they implementing?
Flashcards
Price
Price
The amount a business charges a customer for a product or service.
Cost-plus pricing
Cost-plus pricing
Adding costs of materials, labor, and overheads, then adding a percentage markup.
Price skimming
Price skimming
Setting a high initial price for a new or superior product.
Penetration pricing
Penetration pricing
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Predatory pricing
Predatory pricing
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Competitive pricing
Competitive pricing
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Pricing strategy factors
Pricing strategy factors
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Pricing Strategy
Pricing Strategy
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Study Notes
- Price is a component of a business's marketing mix, specifically one of the 4 Ps.
- Price represents the amount a business charges a customer for its product or service.
- Businesses determine product price by considering production costs, brand image, target market, and target customers.
- This process helps the business develop a pricing strategy.
Cost-Plus Pricing
- Cost-plus pricing involves summing raw material costs, labor expenses, and overheads to determine a product's unit cost.
- A mark-up percentage is added to the unit cost to achieve the final product price and generate a profit margin.
- This method is easy to calculate, and price increases can be justified by rising costs.
- It overlooks price elasticity of demand and market sensitivity.
Price Skimming
- Price skimming involves setting a high initial price, typically when a product is new to market or seen as superior.
- Apple is known to use this method.
- This allows businesses to profit from "early adopters" willing to pay a premium.
- The strategy can fail if competitors enter the market.
Penetration Pricing
- Penetration pricing is where the business sets a low price to attract new customers.
- It aims to encourage customers to switch to the new product and gain market share.
- Profit levels are initially low, and the low price point may hinder the establishment of a quality reputation.
Predatory Pricing
- Predatory pricing involves a dominant business setting prices very low to eliminate competition.
- It is illegal under competition law but difficult to prove.
Competitive Pricing
- Competitive pricing involves accepting the prevailing market price determined by supply, demand, and similar products.
- Businesses using this strategy are "price takers" with weak brands and undifferentiated products.
Psychological Pricing
- Psychological pricing involves setting prices to make customers perceive the product as cheaper.
- It aims to attract customers seeking "value".
- For example, charging £9.99 instead of £10.25 avoids the £10 psychological price barrier.
- 99p is often the psychological price ceiling for items like chocolate bars.
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Description
Explore pricing strategies like cost-plus and price skimming. Cost-plus involves summing costs and adding a markup. Price skimming sets high initial prices for new or superior products to maximize early profits.
