Pricing methods flashcards

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Cost-plus pricing?

Price = Unit cost + Mark-up (%). Simple but ignores demand and competition.

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Penetration pricing?

Low initial price to rapid market share; may sacrifice short-run profit.

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Price skimming?

High initial price; lowered over time as competition enters.

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Competitive pricing?

Set price relative to rivals — match, undercut, or premium.

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Psychological pricing?

£9.99 vs £10; prestige pricing; bundle pricing effects.

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Cost floor (5.4)?

Long run: cover full cost; short run: cover variable cost/contribution minimum.

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When skimming suits?

Innovative product, inelastic demand, few competitors, high R&D to recover.

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When penetration suits?

Elastic demand, economies of scale, deter entrants, fast network effects.

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What is cost-plus pricing?

A pricing method where a fixed percentage mark-up is added to the total cost of producing one unit to determine its selling price. It ensures a profit on each unit sold but ignores market demand.

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When is penetration pricing most suitable?

For a new product entering a competitive, mass market where demand is price elastic. The goal is to build market share quickly by setting a low initial price.

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Define price skimming.

Setting a high initial price for a new, unique product with low competition to maximise revenue from 'early adopters' before lowering the price over time as competitors enter.

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What is the main focus of competitive pricing?

Setting a product's price based on the prices charged by rival firms, rather than on its internal costs or the level of customer demand. It is common in markets with similar products.

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Explain the concept behind psychological pricing.

Using pricing tactics (e.g., £19.99 instead of £20.00) to make a price appear lower than it is, influencing customer perception and encouraging a purchase based on an emotional response rather than rational calculation.