4.3.1

Price

Test yourself on Price

Test your knowledge with free interactive questions on Seneca — used by over 10 million students.

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.
    • Whether the product is hard 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

Business Activity & Influences on Business

1.1

Business Objectives

1.1.1Business Aims1.1.2Business Objectives1.1.3Business Objectives Change Over Time1.1.4End of Topic Test - Business Aims1.1.5Diagnostic Misconceptions - Profit
1.2

Types of Organisations

1.2.1Sole Traders & Partnerships1.2.2Limited Companies1.2.3Limited Liability1.2.4Unlimited vs Limited Liability1.2.5Not For Profit & Franchises1.2.6Multinational Companies1.2.7End of Topic Test - Business Ownership1.2.8Application Questions - Business Ownership1.2.9Diagnostic Misconceptions - Company vs Business1.2.10Diagnostic Misconceptions - Owners vs Shareholders
1.3

Classification of Businesses

1.3.1Sectors
1.4

Decisions on Location

1.4.1Location
1.5

Business & the International Economy

1.5.1Globalisation1.5.2Exchange Rates
1.6

Government Objectives & Policy

1.6.1Government Objectives1.6.2The Government & Business Activity1.6.3Interest Rates1.6.4Interest Rates - Calculations1.6.5Diagnostic Misconceptions - Recessions
1.7

External Factors

1.7.1External Factors
1.8

What Makes a Business Successful?

1.8.1Measuring Success1.8.2Reasons for Failure
2

People in Business

2.1

Internal & External Communication

2.1.1Communication
2.2

Recruitment & Selection Process

2.2.1Types of Employment2.2.2Recruitment Stages2.2.3Effective Recruitment2.2.4Legal Controls Over Employment2.2.5Diagnostic Misconceptions - Internal Recruitment
2.3

Training

2.3.1Training
2.4

Motivation & Rewards

2.4.1Motivation in the Workplace2.4.2Financial & Non-Financial Methods2.4.3End of Topic Test - The Workforce2.4.4Application Questions - The Workforce2.4.5Diagnostic Misconceptions - Money
2.5

Organisation Structures

2.5.1Organisational Structures2.5.2Centralised vs. Decentralised Structures2.5.3Tall & Flat Organisations2.5.4Functional Areas Within a Business2.5.5End of Topic Test - Org Structure
3

Business Finance

3.1

Sources of Finance

3.1.1Internal & External Sources of Finance3.1.2Factors Affecting Sources of Finance
3.2

Cash Flow Forecasting

3.2.1Cash Flow3.2.2Consequences of Cash Flow Problems3.2.3Cash Flow - Calculations3.2.4Solutions to Cash Flow Problems3.2.5Diagnostic Misconceptions - Cash Flow
3.3

Cost & Break-Even Analysis

3.3.1Costs, Revenue & Profit3.3.2Profit, Average Unit Cost & Interest3.3.3Costs - Calculations3.3.4Revenue - Calculations3.3.5Break-Even Analysis3.3.6Profit & Losses - Calculations3.3.7End of Topic Test - Finance3.3.8Grade 9 - Finance3.3.9Diagnostic Misconceptions - Fixed Costs3.3.10Diagnostic Misconceptions - Break-even
3.4

Financial Documents

3.4.1Financial Statements3.4.2Income Statement3.4.3Understanding Business Performance
3.5

Account Analysis

3.5.1Business Calculations3.5.2Gross Profit - Calculations3.5.3Net Profit - Calculations3.5.4Business Calculations 23.5.5Business Calculations 33.5.6Liquidity
4

Marketing

4.1

Market Research

4.1.1Market Research4.1.2Forms of Market Research
4.2

The Market

4.2.1Customer Needs4.2.2Satisfying Customer Needs4.2.3Market4.2.4The Competitive Environment4.2.5Market Segmentation4.2.6Market Mapping - Price vs Quality4.2.7End of Topic Test - Marketing4.2.8Application Questions - Marketing4.2.9Diagnostic Misconceptions - Competition
4.3

The Marketing Mix

4.3.1Price4.3.2Price Penetration4.3.3Other Forms of Pricing4.3.4Product Design4.3.5The Product Life Cycle4.3.6Extending Existing Products4.3.7New Products4.3.8Benefits and Risks of New Products4.3.9Promotion4.3.10Public Relations and Sales Promotion4.3.11Sponsorship & Social Media4.3.12Product Placements4.3.13Promotional Mix4.3.14Place4.3.15Place 24.3.16Place 34.3.17M-Commerce4.3.18Benefits & Drawbacks of M-Commerce4.3.19End of Topic Test - Marketing Mix4.3.20Grade 9 - Marketing Mix4.3.21Diagnostic Misconceptions - Decreasing Price4.3.22Diagnostic Misconceptions - Advertise vs Promote4.3.23Diagnostic Misconceptions - Social Media
5

Business Operations

5.1

Economies & Diseconomies of Scale

5.1.1Economies of Scale5.1.2Diagnostic Misconceptions - Economies of Scale
5.2

Production

5.2.1Production Processes5.2.2Flow and Batch Production5.2.3Production Efficiency5.2.4Technology & Production5.2.5Diagnostic Misconceptions - JIT vs JIC
5.3

Factors of Production

5.3.1Factors of Production
5.4

Quality

5.4.1Importance of Quality5.4.2Identifying Quality5.4.3Total Quality Management5.4.4End of Topic Test - Operational Decisions

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

Unlock your full potential with Seneca Premium

  • Unlimited access to 10,000+ open-ended exam questions

  • Mini-mock exams based on your study history

  • Unlock 800+ premium courses & e-books

Get started with Seneca Premium

Diagnostic Misconceptions - Competition

Price Penetration