30 Questions
What is Price?
The amount of money expected, required, or given in payment for something.
What is Pricing Strategy?
A business can use a variety of pricing strategies when selling a product or service.
How important is Pricing Strategy?
Finding the right pricing strategy is an important element in running a successful business.
What is the Role of the government in regulating prices?
Government has a significant role in regulating price and distribution to maintain a smooth economy in the nation.
What is the consideration for Pricing in challenging economic times?
Pricing is a market consideration, not a cost consideration.
How can businesses adjust pricing during challenging economic times?
Businesses can consider bundling products or services together and focus on their value proposition.
What is the purpose of Loss Leader Pricing?
To encourage sales elsewhere and attract customers to buy other items.
Give an example of a product suitable for Market Skimming Pricing.
Play Station, Digital Technology, DVD, etc.
How does Psychological Pricing play on consumer perceptions?
By setting prices just below a round number, like £9.99 instead of £10.
What is Value Pricing based on?
Consumer perception of value.
What is the main characteristic of Contribution Pricing?
Prices set based on company's perceived value.
Why would a company use Tender Pricing?
To win a specific contract or project.
What is the formula for contribution margin per unit?
Selling price per unit - Variable cost per unit
What is the formula for cost-plus pricing?
Cost + mark-up = selling price
How do you calculate contribution?
Contribution per unit * Number of units sold
What is the formula for contribution ratio?
Contribution / Sales
How is the selling price calculated using cost-plus pricing if the total cost is $55 with a 50% markup?
$55.00 (1 + 0.50) = $82.50
What is contribution pricing?
Contribution = Selling Price – Variable (direct costs)
How do you calculate target cost per unit using target pricing?
Selling Price - Profit Margin
What is marginal cost?
The cost of producing ONE extra or ONE fewer item of production
How do you calculate selling price per unit if the company has net sales of $300,000 and sold 50,000 units?
$300,000 / 50,000 = $6 per unit
Why is marginal cost pricing important in transport?
It allows for a variable pricing structure to cover fixed costs
What is the variable cost per unit if it costs $2 per unit?
$2 per unit
What is value pricing based on?
What consumers THINK should be the price
Why do rivals have difficulty in competing with a price leader?
Too high and they lose market share, too low and the price leader would match price and force smaller rival out of the market
What is the contribution margin per unit?
$4 per unit
In what type of markets is 'going rate' pricing applicable?
Where competition is limited, such as banks, petrol, supermarkets, and electrical goods
What is the concept behind tender pricing?
Contracts awarded on a tender basis where firms submit their price for carrying out the work
What is required for price discrimination to be successful?
Each market to be impenetrable and different price elasticity of demand in each market
When is penetration pricing typically used?
To 'penetrate the market' by setting a low price to secure high volumes, especially for mass market products
Study Notes
Pricing Concepts
- Price: The amount a customer pays for a product or service.
Pricing Strategy
- Pricing Strategy: A plan to set prices for products or services to achieve business objectives.
- Importance of Pricing Strategy: Critical for profitability, revenue, and market share.
Government Role in Pricing
- Role of Government in Regulating Prices: Sets price ceilings, floors, and antitrust laws to protect consumers and promote competition.
Pricing in Challenging Economic Times
- Considerations for Pricing in Challenging Economic Times: Maintain profitability, manage cash flow, and balance short-term and long-term goals.
- Adjusting Pricing During Challenging Economic Times: Consider price reductions, price promotions, or value-added services.
Pricing Strategies
- Loss Leader Pricing: Selling a product at a loss to attract customers and increase sales of other products.
- Market Skimming Pricing: Setting a high initial price for a new product to maximize profits before competition increases.
- Psychological Pricing: Setting prices to influence consumer perceptions, such as using prices ending in .99 or .95.
- Value Pricing: Setting prices based on the perceived value of the product or service to customers.
- Contribution Pricing: Setting prices to maximize contribution margin (selling price - variable costs).
- Tender Pricing: Quoting a price for a specific project or contract.
Calculations
- Contribution Margin per Unit Formula: Selling price - variable costs per unit.
- Cost-Plus Pricing Formula: Total cost + markup percentage.
- Contribution Ratio Formula: Contribution margin per unit / selling price.
- Target Cost per Unit Formula: Target cost / quantity.
- Marginal Cost: The change in total cost when producing one more unit.
- Selling Price per Unit Formula: Net sales / quantity.
Pricing in Specific Markets
- Marginal Cost Pricing Importance in Transport: Critical for optimizing capacity and setting prices for transportation services.
- Going Rate Pricing Applicability: Suitable for markets with similar products and prices among competitors.
- Tender Pricing Concept: Quoting a price for a specific project or contract.
- Price Discrimination Success: Requires the ability to separate markets, maintain secrecy, and ensure price differences are not too large.
Other Pricing Concepts
- Penetration Pricing: Setting a low initial price to gain market share and then increasing the price.
- Price Leader: A company that sets prices that others follow, making it difficult for rivals to compete.
Learn about the value pricing strategy where high-value goods are priced based on consumer perceptions, as well as the going rate pricing strategy where prices are set based on competitors' pricing. Understand how price leaders can influence market competition and how firms may follow pricing leads of dominant rivals.
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