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What factors should you consider in setting a price?
Factors may include consumer perceptions, competition, and market conditions.
Which pricing strategy involves charging $9.99 instead of $10.00?
Going Rate Pricing means using the same price as competitors.
True
What is the purpose of Value Pricing?
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What is Skimming or Milking?
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What is the primary goal of Penetration Pricing?
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Barrier Pricing aims to deter new competitors by reducing prices.
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What does Loss Leading involve?
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List one problem associated with Loss Leading.
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What is a price?
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Which of the following are factors that affect price? (Select all that apply)
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What two key factors determine the price?
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Define markup in the context of pricing.
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How is margin defined?
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What formula can be used to calculate break-even point (BEP)?
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Calculate the selling price if the cost is $0.30, expenses are $0.22, and the desired profit is $0.23.
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What is the purpose of break-even analysis?
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What does 'Economies of Scale' refer to?
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What factors should you consider in setting a price?
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What is Psychological Pricing?
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What is Going Rate Pricing?
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Value Pricing is a long-term high price due to high perceived ______.
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What does Skimming or Milking involve?
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What is the primary goal of Penetration Pricing?
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Loss Leading involves selling a product at a profit.
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What is the difference between Barrier Pricing and Destroyer/Predatory Pricing?
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Which of the following are strategies for pricing?
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What does variable pricing mean?
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Price differentiation means charging different prices for the same product in different markets.
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What is absorption target pricing?
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In absorption target pricing, what does VC represent?
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Match the pricing strategies with their definitions:
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Absorption Target Price = VC + FC + ______
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What is an example of marginal cost pricing resulting in a lower price?
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Study Notes
Pricing Strategies
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Psychological Pricing is changing a price to take advantage of consumer perceptions.
- Example: Charging 9.99insteadof9.99 instead of 9.99insteadof10.00
- Why? Consumers perceive “odd” prices to be lower than “even” ones.
Going Rate Pricing
- Also known as "Follow-the-competition"
- Uses the same price as competitors
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Best if:
- There is a clear price leader who controls the game.
- Where competition is limited.
- Example: Banks, petrol, supermarkets, electrical goods.
Value Pricing
- Long-term higher price due to high perceived value
- Example: If market research indicates customers perceive your chocolate bar as superior to other brands, you could charge a higher price.
Skimming or Milking Pricing
- Short-term high price to “milk” the market for a period of popularity
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Sales volume is low because:
- The product has a short life cycle.
- Competition is bound to catch up.
- The product is a short-term trend.
Penetration Pricing
- Trying to penetrate a new market to gain market share by charging a low price
- Usually attempted when entering very competitive markets
- Goal: To undermine established leaders and encourage customers to try the new product.
Barrier Pricing
- Reduce prices to remove or deter new entrants.
- An aggressive strategy to protect established position.
- Works best in price-sensitive markets.
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Works because established players have:
- Economies of scale: The ability to pay lower unit costs as a result of manufacturing/buying in bulk, therefore each unit covers more of the fixed costs.
Loss Leading
- Pricing a product below cost, therefore selling it at a loss
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Three reasons for loss leading:
- To attract customers for other higher margin products.
- As an extreme form of penetration pricing.
- As an extreme form of barrier pricing.
Destroyer/Predatory Pricing
- Using barrier pricing first (lowering prices to deter or remove competitors), but then increasing prices after cornering the market.
- Often illegal because it encourages monopolies.
Pricing Strategy Categories
- Category A: The strategy that uses the same price as the competition.
- Category B: Higher price strategies.
- Category C: Lower price strategies.
Price Definition
- The amount of money exchanged for a good or service
- Determined by marketers
- Price = Value
Price Determining Factors
- Cost of doing business
- Desired profit
Factors Influencing Price
- Laws and pricing regulations
- Competition pricing
- Product positioning or image
- Consumer demand
- Marketers' judgment about market acceptance
What Determines Price?
- Convenience
- Status and image
- Trends
- Competition
- Quality
- Cost to make and sell
- Target customer spending power
- Desired profit
- Sales volume goals
- Speed of sale
Pricing Calculations
- Variable Costs: Costs that change with the quantity of products or services sold.
- Fixed Costs: Costs that remain constant regardless of production or sales volume.
- Markup: The amount added to the cost of a product, expressed as a percentage. It covers expenses and profit.
- Margin: The percentage of the selling price that is not used to pay for the product. It reflects the profit margin.
- Gross Profit: The revenue remaining after deducting variable costs.
- Break-even Point: The number of units that must be sold at a given price to cover all operating costs.
Determining the Price of a Product
- Cost of doing business: Includes variable costs (costs that change with production) and fixed costs (constant costs).
- Intended profit: The profit a company desires to make on each sale.
Profit
- The amount of money remaining after covering expenses and the cost of goods sold.
- Price = Cost of doing business + Profit
Markup Calculation
- Markup = (Price - Cost) / Cost
Margin Calculation
- Margin = (Expenses + Profit) / Price
Break-Even Analysis
- Variable Costs: Costs that change with production volume.
- Fixed Costs: Costs that remain constant regardless of production volume.
- Contribution (Gross Profit): Selling Price – Variable Costs
Variable Costs
- Costs that vary based on production output.
- Examples: raw materials, packaging, direct labor.
Fixed Costs
- Costs that remain consistent regardless of production levels.
- Examples: rent, utilities, salaries, insurance.
Break-Even Point
- The number of units sold at a given price needed to cover all operating costs.
- BEP = Fixed Costs / Gross Profit
Economies of Scale
- As production volume increases, the cost per unit decreases.
- This is due to fixed costs being spread over a larger number of units.
Pricing Strategies
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Psychological Pricing manipulates consumer perceptions by using prices that seem lower than they are.
- Example: 9.99insteadof9.99 instead of 9.99insteadof10.00
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Going Rate Pricing involves using the same price as competitors in a market.
- This is effective when a price leader controls a market and competitors are limited.
- Example: Supermarkets, petrol stations, and banks often offer very similar prices.
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Value Pricing involves using a high price due to high perceived value.
- High perceived value is often achieved through advertising and market research.
- Example: A chocolate bar that is advertised as superior to competitors might justify a higher price.
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Skimming or Milking is used to maximize profits in the short-term by charging a high price during a product's initial popularity.
- This strategy works best for products with a short life cycle or competitive threats.
- Example: New cell phones or limited-edition t-shirts often use skimming.
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Penetration Pricing aims to gain market share by charging a low price, often close to production costs.
- This is used to enter competitive markets and encourage brand trial.
- Example: A new chip company entering a competitive market could use a low price to gain traction.
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Barrier Pricing uses price reductions to deter new entrants and protect market share in price-sensitive markets.
- Established players have advantages like economies of scale which allow them to offer lower prices.
- Example: An established company could lower prices to make it difficult for new companies to compete.
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Loss Leading involves selling a product below cost in order to attract customers for other, higher-margin products.
- Example: A gas station might offer low gas prices to attract customers who then buy other items.
- Loss leading can also be used as an aggressive form of penetration or barrier pricing.
Variable Pricing
- Variable Pricing involves changing the price of a product based on demand and supply, offering a lower price when inventory needs to be cleared (e.g., expiring products) and a higher price when demand is high or supply is low.
Price Differentiation
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Price Differentiation involves charging different prices for the same product in various markets to maximize revenue.
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To be successful, price differentiation relies on consumers being unaware or unconcerned about price differences and barriers to entry (e.g., tariffs or laws) preventing consumer/competitor arbitrage.
Absorption Target Pricing
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Absorption Target Pricing sets the price to cover variable costs, absorb some fixed costs, and achieve a desired profit based on projected sales.
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The formula for absorption target price is: VC + FC + NP, where VC represents variable cost, FC represents fixed cost, and NP represents net profit.
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Absorption Target Pricing is a commonly accepted pricing strategy but relies heavily on accurate sales estimations and may not factor in competitor actions.
Marginal Cost Pricing
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Marginal Cost Pricing is a short-term strategy that sets the price based on the cost of producing one additional (or one fewer) unit of the product.
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It is useful when a company has unused production capacity (e.g., empty airplane seats) or when the cost of supplying an extra unit is higher than the regular cost.
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Description
This quiz explores various pricing strategies such as psychological pricing, going rate pricing, value pricing, and skimming pricing. Test your understanding of how these strategies can influence consumer perception and market positioning. Perfect for marketing students and professionals alike!
