Pricing Decisions and Strategies: Objectives, Methods and Policies Questions

Question 1

Define price.

Accepted Answer

Price is the amount of money charged for a product/service or the value exchanged by customers to obtain the product benefits.

Question 2

State one pricing objective.

Accepted Answer

Target profit/ROI is one pricing objective.

Question 3

What is cost-plus pricing?

Accepted Answer

Cost-plus pricing is setting price by adding a fixed mark-up to the cost of the product.

Question 4

What is penetration pricing?

Accepted Answer

Penetration pricing is setting a low introductory price to gain market share quickly.

Question 5

What is trade discount?

Accepted Answer

Trade discount is a reduction in list price given to intermediaries like wholesalers and retailers.

Question 6

Define price elasticity of demand.

Accepted Answer

Price elasticity of demand measures how much quantity demanded changes in response to a change in price.

Question 7

Explain pricing objectives (any three) with brief points.

Accepted Answer

Pricing objectives differ by business goals. Any three are:

1) Profit objective: set price to achieve target profit/ROI.
2) Market share objective: use lower price (penetration) to capture more customers.
3) Sales/revenue objective: maximise sales volume or turnover.
4) Survival objective: price low to survive in crisis/intense competition.
5) Image/quality leadership: premium pricing to create high-quality brand image.

Thus, objectives guide the choice of method and strategy.

Question 8

Explain factors affecting pricing decisions (internal and external).

Accepted Answer

Internal factors: cost of production/distribution, company objectives, marketing strategy, PLC stage, brand positioning.

External factors: demand and elasticity, customer perceived value, competitor prices, government regulation/taxes, economic conditions (inflation, income).

Pricing decisions are made by balancing these internal and external influences.

Question 9

Differentiate between skimming pricing and penetration pricing.

Accepted Answer

Skimming pricing: high initial price, then reduced gradually; suitable for unique products and less price-sensitive customers; helps recover R&D quickly.

Penetration pricing: low initial price to gain market share quickly; suitable for mass market and price-sensitive demand; discourages competitors by building volume.

Thus, skimming focuses on margin; penetration focuses on volume and share.

Question 10

Explain cost-based, demand-based and competition-based pricing methods (brief).

Accepted Answer

1) Cost-based pricing: price = cost + mark-up (cost-plus, target return). Simple but may ignore demand.
2) Demand/value-based pricing: price based on customer perceived value and willingness to pay; needs research.
3) Competition-based pricing: set price based on competitor level (going-rate); useful in similar products markets but may ignore own costs/value.

Firms often combine these approaches.

Question 11

Explain psychological pricing with examples.

Accepted Answer

Psychological pricing uses customer perception and feelings about price. Examples:
- Odd pricing: ₹99 instead of ₹100 (appears cheaper).
- Prestige pricing: high price to signal premium quality (luxury brands).
- Bundling: combo offers to make deal look attractive.

It works where consumers use price as a cue for value and quality.

Question 12

Explain types of discounts (any three) with meaning.

Accepted Answer

Discounts encourage buying and channel support. Any three:
1) Trade discount: given to wholesalers/retailers for reselling and channel margins.
2) Cash discount: given for early/quick payment.
3) Quantity discount: offered for bulk purchases to increase volume.
4) Seasonal discount: offered in off-season to reduce stock and stabilise demand.

Discounts must be planned to avoid profit erosion.

Question 13

Explain the pricing decision process and how a firm sets the final price (exam-style).

Accepted Answer

Pricing decision process is a step-by-step approach to set a price that matches objectives, customer value and competition.

1) Set pricing objective
- Decide whether the goal is profit, market share, sales growth, survival, or premium image.

2) Estimate demand and customer value
- Understand willingness to pay, perceived value, and price elasticity.
- Identify customer segments and what benefits they value.

3) Estimate costs
- Calculate fixed and variable costs; determine minimum price floor.
- Use break-even analysis to know minimum sales required.

4) Analyse competition
- Study competitor prices, offers, quality and positioning.
- Decide whether to price above, below or at par with competitors.

5) Select pricing method/strategy
- Choose cost-plus, value-based or competitive pricing; decide skimming/penetration, psychological pricing, etc.

6) Set final price and price adjustments
- Decide list price, discounts/allowances, promotional price, geographical price, and credit terms.

7) Monitor and revise
- Track sales, profit, competitor response and customer feedback; adjust price if required.

Thus, final price is not only cost-based; it is the result of balancing objective, customer value and competition.

Question 14

Discuss pricing strategies for a new product: skimming and penetration. State conditions, advantages and limitations.

Accepted Answer

New product pricing commonly uses skimming or penetration strategy.

1) Price skimming
- Meaning: charge a high initial price and reduce it over time.
- Suitable conditions: unique/innovative product, strong brand, low competition at launch, less price-sensitive customers.
- Advantages: high early profit margins, quick recovery of R&D/launch costs, premium image.
- Limitations: attracts competitors, slow market penetration, may not work in price-sensitive markets.

2) Penetration pricing
- Meaning: charge a low initial price to enter market quickly and gain market share.
- Suitable conditions: large mass market, high price elasticity, economies of scale, intense potential competition.
- Advantages: rapid market share growth, discourages competitors, builds volume and distribution support.
- Limitations: low margins initially, may create low-price image, difficult to raise price later.

Thus, skimming focuses on margin and premium segment, while penetration focuses on volume and market share.

Question 15

Explain pricing methods (cost-based, demand-based, competition-based) and compare them with suitable examples.

Accepted Answer

Pricing methods can be broadly classified into cost-based, demand-based and competition-based.

1) Cost-based pricing
- Price is set by adding a mark-up to cost (cost-plus) or by target return.
- Example: manufacturer sets price = cost + 20% profit margin.
- Advantage: simple and ensures cost coverage; Limitation: ignores demand and competition.

2) Demand/value-based pricing
- Price is set based on customer perceived value and willingness to pay.
- Example: premium smartphone priced higher because customers value camera, brand and ecosystem.
- Advantage: captures value and can increase profit; Limitation: needs good market research.

3) Competition-based pricing
- Price is set with reference to competitors (going-rate, tender pricing).
- Example: telecom plans priced similar to competitors to stay competitive.
- Advantage: easy and market-aligned; Limitation: may ignore own cost structure and differentiation.

Comparison summary: cost-based focuses on internal cost, demand-based focuses on customer value, and competition-based focuses on market rivals. In practice, firms often use a combination.

Pricing Decisions and Strategies: Objectives, Methods and Policies

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