Business - 4.5 Aspects of Pricing (Definition, Advantages, Disadvantages)

https://quizlet.com/th/1005495521/business-45-aspects-of-pricing-flash-cards/?funnelUUID=336ae838-de3e-467f-8e59-7c6b2a2de6de

Cost-Plus (Mark-Up) Pricing: Definition

• Fixed percentage (mark-up) + Production cost = Selling Price

Example: • $50 production cost + 50% mark-up = $75 selling pric

Cost-Plus (Mark-Up) Pricing: Advantages ✅

Advantages ✅ [consistent, simple to implement] • Price stability: consistent pricing • Simple to implement • Eliminates need for market research (just need to know production cost and mark-up percentage) • Stable profit margins

Cost-Plus (Mark-Up) Pricing: Disadvantages ❌

Disadvantages ❌ [ignores demand and competition, not flexible] • Ignores demand and competition • Risks inefficiency • Less Flexible, hard to adjust prices • Not competitive in saturated markets • Doesn't reflect customer value • Affected by inflation

Penetration Pricing: Definition

• Low initial price • Aim to attract customers quickly • Gain high market share!

Example: • IKEA in China

Penetration Pricing: Advantages ✅

Advantages ✅ • Low price = encouraged consumers • High sales volume and market share • Increases stock turnover

Penetration Pricing: Disadvantages ❌

Disadvantages ❌ • High sales volume doesn't always mean achieving high profits • Customers may perceive the product to be low quality • Only suitable for price-sensitive markets (price increase may lose potential customers)

Loss Leader: Definition

Definition: • Product is sold at a lower price than its cost • Market entry • ↑ Market share

Example: McDonalds $1 menu

Loss Leader: Advantages ✅

Advantages ✅ • ↑ buyer attraction • Encourage people to explore other high-margin products • Boost sales

Loss Leader: Disadvantages ❌

Disadvantages ❌ • Risk of losses (profits may drop if customers only buy discounts) • Not suitable in the long-term (can hurt profitability)

Predatory Pricing: Definition

Definition: • Low price to drive competitors out of the market • Creates barrier of entry for new competitors • DESTROY ALL COMPETITION!

Predatory Pricing: Advantages ✅

Advantages ✅ • Gain a dominant position in market • Minimized competition • New entrants are deterred from entering (cuts out potential competition)

Predatory Pricing: Disadvantages ❌

Disadvantages ❌ • Illegal in many countries (anti-competitive behavior) • Difficult to sustain in the long-term

Premium Pricing: Definition

Definition: • Sustains high price • Impression of quality

Examples: • Apple • Gucci • Rolex

Premium Pricing: Advantages ✅

Advantages ✅ • Customers perceive the products as quality • ↑ profit margin • ↑ brand value • ↑ social status

Premium Pricing: Disadvantages ❌

Disadvantages ❌ • ↑ marketing cost • Can't implement for all product types • Misses price-conscious consumers