Podcast
Questions and Answers
A new tech startup is launching a revolutionary gadget with limited initial production capacity. Which pricing strategy would be most suitable in the short term?
A new tech startup is launching a revolutionary gadget with limited initial production capacity. Which pricing strategy would be most suitable in the short term?
- Cost-plus pricing, to ensure immediate profitability.
- Penetration pricing, to quickly gain market share.
- Price skimming, to maximize revenue from early adopters. (correct)
- Competitive pricing, to match established brands.
Which of the following is a key disadvantage of penetration pricing?
Which of the following is a key disadvantage of penetration pricing?
- It always results in long-term customer loyalty.
- Customers may switch to competitors when prices increase. (correct)
- It quickly establishes a strong brand image.
- It can lead to high initial profits.
A local bakery decides to price its signature cake at $19.99 instead of $20.00. Which pricing strategy does this BEST exemplify?
A local bakery decides to price its signature cake at $19.99 instead of $20.00. Which pricing strategy does this BEST exemplify?
- Price skimming
- Competitive pricing
- Cost-plus pricing
- Psychological pricing (correct)
Which pricing strategy is considered illegal due to its anti-competitive nature?
Which pricing strategy is considered illegal due to its anti-competitive nature?
A company with a strong brand and highly differentiated products is MOST suited to employ which pricing strategy?
A company with a strong brand and highly differentiated products is MOST suited to employ which pricing strategy?
A business operating in a highly competitive market would MOST likely utilize which pricing strategy?
A business operating in a highly competitive market would MOST likely utilize which pricing strategy?
A company selling a commodity product with little differentiation from its competitors should be MOST concerned about which factor when determining its pricing strategy?
A company selling a commodity product with little differentiation from its competitors should be MOST concerned about which factor when determining its pricing strategy?
A restaurant wants to ensure they cover all their costs and make a profit on each dish. Which pricing strategy would they MOST likely use?
A restaurant wants to ensure they cover all their costs and make a profit on each dish. Which pricing strategy would they MOST likely use?
Flashcards
Cost-Plus Pricing
Cost-Plus Pricing
Adding a markup percentage to the unit cost to determine the selling price.
Price Skimming
Price Skimming
Setting a high initial price for a new product to capture early adopters, then lowering it over time.
Penetration Pricing
Penetration Pricing
Setting a low initial price to quickly gain market share, then increasing it later.
Competitive Pricing
Competitive Pricing
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Predatory Pricing
Predatory Pricing
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Psychological Pricing
Psychological Pricing
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USP/Differentiation
USP/Differentiation
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Price Elasticity of Demand
Price Elasticity of Demand
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Study Notes
- Types of pricing strategy:
- Cost plus (calculating mark-up on unit cost)
- Price skimming
- Penetration
- Predatory
- Competitive
- Psychological
- Factors that determine the most appropriate pricing strategy for a particular situation:
- Number of USPs/amount of differentiation
- Price elasticity of demand
- Level of competition in the business environment
- Strength of brand
- Stage in the product life cycle
- Costs and the need to make a profit
Cost Plus Pricing
- Calculates mark up cost on unit cost
- Restaurants often do 3x ingredient cost
- Benefit: Inward looking, focus on your costs to ensure a profit
- Downside: Can lose out on competition if competitors have lower costs
Price Skimming
- Initially enter the market with a high price before competition joins
- When others enter, the price lowers
- Early adopters are willing to pay a high price
- Benefit: high revenue for early adopters
- Downside: Encourages competitors to join at a lower price, taking market share
Penetration Pricing
- Starts with a low price, then increases over time
- Mini Moons are initially very low priced and increase once loyalty is gained
- Benefit: Increases revenue once loyalty has increased
- Downside: Customers may leave once the price has increased
Competitive Pricing
- Based on competitor's pricing
- Can undercut them or set slightly higher prices if customers think your quality is better
- Advantage: USP
- Disadvantage: Profit margins
Predatory Pricing
- Illegal
- Sets a price below the cost of production
- Anticompetitive
Psychological Pricing
- Setting a price that customers associate with a trait, to encourage purchase
- Decoy pricing - like Coke pricing - is an example
- 9.99 makes customers think it is cheap
- 2.00 compared to rivals 1.50 makes customers think its good quality
Influences on Pricing Strategy
- USP/amount of differentiation
- Price elasticity of demand
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Description
Explore various pricing strategies, including cost-plus, skimming, and penetration pricing. Understand the factors that determine the most appropriate pricing strategy, such as competition, brand strength and product life cycle. Cost-plus pricing calculates markup on unit cost.
