pricing strategies

What is penetration pricing?

It is a strategy where a business sets a low initial price to attract new customers and increase market share, with the intention to increase prices once this objective is achieved.

What is a key advantage of penetration pricing?

It can catch competition off guard and can act as a barrier to entry for other potential competitors.

What is a key disadvantage of penetration pricing?

The low initial price can create an expectation of permanently low prices amongst customers, making it harder to increase them later.

What is price skimming?

It is a pricing strategy where a higher price is charged for a new product to take advantage of customers prepared to pay for innovation.

For what type of products is price skimming typically used?

It is used for technologically innovative products, giving a business leverage until the technology is adaptable by other players.

What is an advantage of a pricing strategy that covers development costs?

It covers the costs of innovation and provides money for product development.

How can a pricing strategy help segment the market and build brand image?

It allows you to segment the market and target customers at different price levels, and can create a higher-end brand image to increase customer loyalty.

What is a major disadvantage of a pricing strategy that cannot be sustained long-term?

It cannot last for long, as competitors soon launch rival products that put pressure on the price.

What is a risk of a pricing strategy related to inventory if it doesn't work effectively?

It may end up with excess inventory if skimming doesn't work.

Define Dynamic Pricing.

Dynamic pricing is a pricing strategy that charges customers different prices based on fluctuations in market demand.

What are some common examples of services or goods that use dynamic pricing?

It is used when service or goods demand changes constantly, for example, Uber and tickets for concerts or hotel stays.

What are the advantages of dynamic pricing in terms of revenue and customer loyalty?

Increased revenue can provide better prices, increasing customer loyalty and satisfaction.

How does dynamic pricing help businesses remain competitive and manage inventory?

It allows the business to remain competitive by adjusting prices in response to market changes, and businesses can reduce excess inventory and optimize stock levels by adjusting prices to match demand.

What is a key disadvantage of dynamic pricing related to customer perception and business reputation?

Customers may become frustrated if prices fluctuate too frequently or feel they've been charged too much, which can damage a business's reputation.

What market-related disadvantage can arise from dynamic pricing due to competitive actions?

Possible price wars, as companies must be cautious to remain competitive.

What is psychological pricing?

A method businesses use to set prices to influence how customers perceive the value of a product or service, often by using prices slightly below a whole number or specific price points to manipulate cognitive biases.

What are common tactics used in psychological pricing?

Using prices slightly below a whole number (e.g., $9.99) or specific price points to make consumers perceive a product as more affordable, attractive, or valuable.

In what type of markets is psychological pricing commonly used?

It is frequently used in high-competition markets, such as supermarkets.

What are the advantages of psychological pricing?

Increased sales due to a perception of better value, improved product perception (prestige pricing), and ease of comparison through price lining.

What are the disadvantages of psychological pricing?

Consumers may misperceive the product's value if it's always on discount, it can lead to an unsustainable competitive advantage, and competitive strategies can result in price wars, reducing profit margins.

What is a loss leader?

A product whose price is set deliberately below the cost of production to attract customers who will subsequently buy other, more profitable products.

How do convenience retailers often utilize loss leaders?

They frequently use a mix of loss leader products and standard pricing for other items to achieve their overall profit margins.

What is the main purpose of loss leader pricing?

To increase footfall in a store and boost overall sales to cover the loss from lower-priced items.

How can loss leader pricing attract new customers?

Window promotions displaying discounted offers may entice new customers, and word of mouth about low prices can bring in local customers.

What is a potential disadvantage if loss leader pricing doesn't attract new customers or stimulate sales of other items?

It can result in reduced margins and a risk of making a loss.

How can customer perception of quality be affected by loss leader pricing?

Customers may perceive the quality of an item as low, out-of-date, or damaged if the price is too low.

What negative customer behavior can loss leader pricing encourage?

Cherry-picking, where customers solely purchase discounted loss leaders, which can negatively impact visits for other items.

What is predatory pricing?

A pricing strategy that relies on undercutting competition long enough to force them out of the market by setting prices below costs.

What is an advantage of predatory pricing related to market share?

It allows a business to gain a larger market share by attracting customers through lower prices.

How can predatory pricing lead to lower production costs?

By gaining a larger market share, a business can achieve economies of scale, leading to lower production costs and higher profitability in the long run.

What effect can predatory pricing have on potential competitors?

It can deter potential competitors from entering the market.

What is a major disadvantage of predatory pricing strategies in the short-term?

It can lead to short-term financial losses, reducing profits and straining financial resources as prices are set below production costs.

What can happen if competitors survive an initial price-cutting phase initiated by predatory pricing?

They can counter with price cuts, leading to a price war that can harm all market participants.

Define a 'price taker' in a market context.

A market participant who has no influence or impact on the market price of a product and must accept the prevailing market price.

In what type of market are price takers typically found?

A market where there are many sellers selling identical products.

What is an advantage for price takers regarding pricing strategy?

They do not have to spend resources on developing complex pricing strategies, as they accept the prevailing market price.

What can price takers focus on without the pressure to constantly innovate or differentiate products?

Production and operations.

How does the market flexibility benefit price takers?

They can easily enter or exit the market without significant barriers.

What does a level playing field, where no single firm manipulates prices, promote among price takers?

Healthy competition.

What is a disadvantage for firms that have little control over the market price?

It can limit their ability to influence the market or generate higher profits.

Why is it challenging for firms selling homogeneous products to differentiate themselves?

Their products are very similar to competitors'.

How does the inability to set prices or offer unique products affect a firm's brand loyalty?

It makes it harder to build customer loyalty.

What market effect can intense competition cause for firms unable to command higher prices?

It can lead to lower profit margins.

Define price leadership.

Price leadership occurs when a leading firm in an industry exerts enough influence to determine the price of goods for the sector.

In what market scenario is price leadership typically observed?

It's seen in markets where a few large firms dominate and other active firms have very small market shares.

What is an advantage for price leaders in terms of their profits?

They can set the price in a way that maximizes their profits, leading to higher profits.

How can price leadership benefit other competing firms if the leader sets high prices?

If other firms follow the leader's high prices, all competing firms would benefit and get higher profits.

How can price leaders utilize their maximized profits for product improvement?

They can use some of the profit to reinvest in research for product developments, new features, and higher quality products.