2.2.3

Price

Test yourself on Price

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Price

There are 4 key factors that influence a firm’s pricing decisions. Costs and product life cycle are internal factors. The nature of a product and the degree of competition are external factors.

Costs

Costs

  • Costs influence firm’s pricing decisions because firms usually aim to make profit.
  • A firm’s price and costs determines how much profit the firm will make. Businesses cannot afford to set a price lower than their costs forever.
Product life cycle

Product life cycle

  • Where a product is in the product life cycle determines whether the firm will charge a high or low price for the product.
  • When a new product is launched, firms may charge higher prices to take advantage of exclusivity.
  • When Apple launches new iPhones (like the iPhone X), they charge higher prices. The iPhone X cost $1,000 in Autumn 2017, but this price fell to $850 by February 2018.
Nature of product

Nature of product

  • The nature of a product affects pricing in 2 key ways:
    • Whether a good is a luxury good will affect how much a business charges.
    • How hard it is to differentiate from competitors affects how much a business can charge. If it is similar (homogenous), then businesses usually price at a similar level to competitors.
  • For example, in the crude oil market, oil is the same no matter who produces it. This means that there is a uniform price (same price for all businesses and customers) in the market.
Degree of competition

Degree of competition

  • The degree of competition affects the pricing decision of firms because the more competition a firm faces, the more options customers have.
  • When customers have lots of options for similar products, businesses must compete to attract customers using a lower price.

Setting Pricing - Price Skimming

Price skimming is a pricing method where a business sets a relatively high initial price and then gradually lowers it over time. This is often used before a business faces competition in the market. Once competition arrives, there will be downward pressure on the price to fall.

Maximise revenue

Maximise revenue

  • Price skimming is used to try and maximise revenue.
  • Consumers who buy early on are willing to pay a higher price but the business can still attract other customers who can pay a lower price later on in the product’s lifecycle.
Cover fixed costs (research and development)

Cover fixed costs (research and development)

  • Price skimming can help to recover the costs of research and development, which can be expensive for technology products.
    • For example, the Apple iPhone X reportedly cost over $1bn in research and development costs.
Slower unit sales growth

Slower unit sales growth

  • A disadvantage of price skimming is that it can slow down the growth of a product and this can give competitors more time to launch a competing product or service.
  • A company does not maximise the number of sales at the start so competitors can get more of a chance to enter the market.
Jump to other topics
1

Investigating Small Business

1.1

Enterprise & Entrepreneurship

1.1.1The Dynamic Nature of Businesses1.1.2Risk & Reward1.1.3The Role of Business Enterprise1.1.4The Role of Business Enterprise 21.1.5The Role of the Entrepreneur1.1.6End of Topic Test - Dynamic Nature of Business1.1.7Grade 9 - Dynamic Nature of Business
1.2

Spotting a Business Opportunity

1.2.1Customer Needs1.2.2Market Research1.2.3Market Segmentation1.2.4The Competitive Environment1.2.5Primary & Secondary Market Research1.2.6End of Topic Test - Business Opportunities1.2.7Application Questions - Business Opportunities1.2.8Exam-Style Questions - Market Segmentation1.2.9Diagnostic Misconceptions - Competition
1.3

Putting a Business Idea into Practice

1.3.1Business Aims1.3.2Business Objectives1.3.3Business Revenues & Costs1.3.4Costs - Calculations1.3.5Revenue - Calculations1.3.6Business Profits & Break-Even Analysis1.3.7Profits & Losses - Calculations1.3.8Interest - Calculations1.3.9Cash & Cash Flow1.3.10Cash & Cash Flow 21.3.11Cash Flow - Calculations1.3.12Sources of Business Finance1.3.13End of Topic Test - Business in Practice1.3.14Grade 9 - Business in Practice1.3.15Exam-Style Questions - Business in Practice1.3.16Diagnostic Misconceptions - Profit1.3.17Diagnostic Misconceptions - Company vs Business1.3.18Diagnostic Misconceptions - Economies of Scale1.3.19Diagnostic Misconceptions - Cash Flow1.3.20Diagnostic Misconceptions - Break-even1.3.21Diagnostic Misconceptions - Fixed Costs
1.4

Making the Business Effective

1.4.1The Options for Start-Up & Small Businesses1.4.2Limited Liability1.4.3Franchising & Not-For-Profits1.4.4Business Location1.4.5The Marketing Mix1.4.6Business Plans1.4.7End of Topic Test - Effective Business1.4.8Application Questions - Effective Business1.4.9Exam-Style Questions - Business Plans
1.5

Business Stakeholders

1.5.1Business Stakeholders1.5.2Technology & Business1.5.3Legislation & Business1.5.4Legislation & Business 21.5.5The Economy & Business1.5.6External Influences1.5.7End of Topic Test - Business Stakeholders1.5.8Grade 9 - Business Stakeholders1.5.9Diagnostic Misconceptions - Recessions
2

Building a Business

2.1

Growing the Business

2.1.1Business Growth2.1.2Finance2.1.3Changes in Business Aims & Globalisation2.1.4Ethics & Business2.1.5The Environment & Business2.1.6End of Topic Test - Growing a Business2.1.7Application Questions - Growing a Business2.1.8Exam-Style Questions - Business Growth
2.2

Making Marketing Decisions

2.2.1Product2.2.2Product Life Cycle2.2.3Price2.2.4Pricing Methods2.2.5End of Topic Test - Product & Price2.2.6Grade 9 - Product & Price2.2.7Promotion & Advertising2.2.8PR & Sales Promotions2.2.9Sponsorship & Product Placement2.2.10Promotional Mix2.2.11End of Topic Test - Promotion2.2.12Application Questions - Promotion2.2.13Exam-Style Questions - Promotional Mix2.2.14Place & Wholesalers2.2.15Direct to Consumer2.2.16E-commerce & M-commerce2.2.17Diagnostic Misconceptions - Decreasing Price2.2.18Diagnostic Misconceptions - Advertise vs Promote2.2.19Diagnostic Misconceptions - Social Media
2.3

Making Operational Decisions

2.3.1Job Production2.3.2Batch & Flow Production2.3.3Working with Suppliers2.3.4Effective Supply Chains2.3.5Just In Time & Just In Case2.3.6Managing Quality2.3.7Total Quality Management2.3.8The Sales Process2.3.9End of Topic Test - Operational Decisions2.3.10Grade 9 - Operational Decisions2.3.11Exam-Style Questions - Managing Stock2.3.12Diagnostic Misconceptions - JIT vs JIC
2.4

Making Financial Decisions

2.4.1Gross Profit & Net Profit - Definitions2.4.2Gross Profit - Calculations2.4.3Net Profit - Calculations2.4.4Rate of Return2.4.5Rate of Return - Calculations2.4.6Research & Financial Data2.4.7Marketing Data2.4.8Percentage Change - Calculations
2.5

Making Human Resource Decisions

2.5.1Organisational Structures2.5.2Organisational Structures 22.5.3Recruitment2.5.4Effective Recruitment2.5.5Training a Workforce2.5.6Motivating a Workforce2.5.7End of Topic Tests - Human Resources2.5.8Application Questions - Human Resources2.5.9Exam-Style Questions - Human Resources2.5.10Diagnostic Misconceptions - Owners vs Shareholders2.5.11Diagnostic Misconceptions - Internal Recruitment2.5.12Diagnostic Misconceptions - Employee Motivation

Practice questions on Price

Can you answer these? Test yourself with free interactive practice on Seneca — used by over 10 million students.

  1. 1
    Which of these things affect a firm's pricing decisions?Multiple choice
  2. 2
    The 4 key factors that influence a firm's pricing are:Fill in the list
  3. 3
    Why can price skimming be good?Multiple choice
  4. 4
    What is a disadvantage of price skimming?Multiple choice
Answer all questions on Price

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Product Life Cycle

Pricing Methods