Pricing Methods and Strategies: Cost-Plus, Value-Based, Skimming, Penetration and Price Discrimination (Basics) Questions

Question 1

Write any one pricing objective.

Accepted Answer

One pricing objective is **profit maximization** (earning maximum profit in the short run or long run).

Question 2

What is cost-plus pricing?

Accepted Answer

**Cost-plus pricing** sets selling price by adding a **markup/profit margin** over the **unit cost**.

Question 3

Define pricing.

Accepted Answer

**Pricing** is the process of deciding the **monetary value (price)** to be charged for a product or service.

Question 4

What is skimming pricing?

Accepted Answer

**Skimming pricing** means charging a **high initial price** for a new product and reducing the price gradually over time.

Question 5

What is price discrimination?

Accepted Answer

**Price discrimination** is charging **different prices** for the **same product/service** to different customers/markets based on **differences in willingness to pay**, not because of cost differences.

Question 6

State any one factor affecting pricing decision.

Accepted Answer

One factor affecting pricing is **demand conditions/price elasticity** (how strongly quantity demanded changes with price).

Question 7

Explain pricing objectives (any four).

Accepted Answer

Pricing objectives (any four):

- **Profit maximization**: set price to earn maximum profit, considering cost and demand.
- **Market share / sales growth**: keep price competitive to increase sales volume and capture customers.
- **Survival**: in intense competition or recession, price may be set to cover variable cost and maintain operations.
- **Price stability**: maintain stable prices to avoid frequent changes and reduce risk of price wars.
- **Brand image/quality positioning**: higher price can signal premium quality and maintain brand prestige.
- **Target ROI**: price is set to achieve a desired return on investment over time.

Thus, objectives guide whether the firm chooses premium pricing, competitive pricing, or penetration pricing.

Question 8

Explain cost-plus (markup) pricing: steps and two limitations.

Accepted Answer

### **Cost-Plus (Markup) Pricing**

**Meaning:** Price is decided as **Unit Cost + Markup**.

**Steps:**
- **Step 1: Find unit cost**: calculate variable cost per unit and allocate fixed cost per unit at expected output.
- **Step 2: Decide markup**: choose profit margin (percentage or amount) based on target profit/ROI.
- **Step 3: Set price and review**: final selling price is fixed and later reviewed if cost or demand changes.

**Limitations (any two):**
- **Ignores demand and competition**: even if cost is covered, customers may not buy at that price.
- **Cost estimation problem**: wrong output estimate gives wrong fixed cost per unit, leading to wrong price.

Hence, cost-plus is simple but should be supported by demand and competitor analysis.

Question 9

Explain value-based pricing and why it is suitable for differentiated products (any three points).

Accepted Answer

### **Value-Based Pricing**

**Value-based pricing** sets price according to **customer perceived value** (benefits/utility) instead of only cost.

Why suitable for differentiated products (any three):
- **Differentiation creates higher perceived value** (brand, features, design, service), so customers may accept a higher price.
- Firms can capture **consumer surplus** by pricing closer to willingness to pay.
- Helps in **positioning**: premium price supports premium image and quality perception.

Mini table:

| Basis | Cost-plus | Value-based |
|---|---|---|
| Focus | cost + markup | value perception |
| Best for | standardized products | differentiated products |

Thus, value-based pricing is effective when the firm can clearly communicate and deliver superior value.

Question 10

Differentiate between skimming pricing and penetration pricing (any three points).

Accepted Answer

Skimming pricing vs Penetration pricing (any three points):

- **Initial price**: **High** (skimming) vs **Low** (penetration).
- **Main objective**: recover costs and earn high profit per unit vs gain **market share** quickly.
- **Suitable conditions**: innovation + low initial competition + less price-sensitive customers vs highly price-sensitive market + strong competition + scale economies.

Quick table:

| Point | Skimming | Penetration |
|---|---|---|
| Price at launch | high | low |
| Target | early adopters | mass market |

Hence, choice depends on demand, competition and cost structure.

Question 11

Explain conditions required for price discrimination (any three) with examples.

Accepted Answer

### **Conditions for Price Discrimination**

Price discrimination works when (any three):
- Seller has **market power** (imperfect competition) so it can influence price.
- Ability to **segment the market** into groups with different willingness to pay (students, adults; peak, off-peak).
- Prevention of **resale/arbitrage** between markets; otherwise buyers will buy cheap and resell.
- Different **price elasticity** across segments (more elastic group gets lower price).

Examples:
- cinema offers **student discount**.
- airlines charge different fares for same route based on booking time and class.

Thus, segmentation + no resale are essential for effective price discrimination.

Question 12

Explain key factors affecting pricing decisions (any three) with brief explanation.

Accepted Answer

Key factors affecting pricing decisions (any three):

- **Cost structure**: fixed and variable costs decide the minimum feasible price and margin; wrong cost estimate can cause loss.
- **Demand and elasticity**: if demand is price-elastic, a small price rise can reduce sales sharply; in inelastic demand, firms can charge higher price.
- **Competition**: competitor prices and possible reactions (price cuts/price war) restrict the firm’s pricing freedom.
- **Government/legal factors**: taxes, price ceilings, and regulations can limit pricing.

Thus, a good price is chosen by balancing **cost**, **customer demand**, and **competitive conditions**.

Question 13

Explain pricing methods and strategies used by firms with a suitable flowchart (exam-style).

Accepted Answer

### **Pricing Methods and Strategies (Exam-Style)**

Pricing is not a single-step decision. Firms choose a method (how to compute price) and a strategy (how to set price to meet objectives).

#### **A) Pricing methods (how price is computed)**
- **Cost-based**: start from **cost** and add margin (cost-plus).
- **Value-based**: start from **customer value** and willingness to pay.
- **Competition-based**: set price with reference to competitors (going-rate, premium, discount).

#### **B) Pricing strategies (how price is used in the market)**
- **Skimming**: high initial price → later reduction.
- **Penetration**: low initial price → gain market share → later stabilize.
- **Price discrimination**: different prices for different segments (when allowed).

Flowchart:

```text
Set pricing objective
      ↓
Study cost + demand (elasticity) + competition + legal factors
      ↓
Choose method: Cost-based / Value-based / Competition-based
      ↓
Select strategy: Skimming / Penetration / Discrimination / Going-rate
      ↓
Fix price + implement
      ↓
Monitor sales & profit → revise price if needed
```

**Conclusion:** A good pricing decision balances **cost recovery**, **customer value**, and **competitive position** to achieve the chosen objective.

Question 14

Explain cost-plus pricing with a numerical illustration (simple) and comment on suitability.

Accepted Answer

### **Cost-Plus Pricing: Numerical Illustration**

**Given (example):**
- Variable cost per unit = Rs. 60
- Total fixed cost = Rs. 40,000
- Expected output = 2,000 units
- Desired markup = 25% on total unit cost

**Step 1: Find fixed cost per unit**
Fixed cost per unit = 40,000 / 2,000 = Rs. 20

**Step 2: Find total unit cost**
Total unit cost = Variable cost + Fixed cost per unit = 60 + 20 = Rs. 80

**Step 3: Add markup**
Markup = 25% of 80 = Rs. 20

**Selling price (cost-plus price)**
Price = 80 + 20 = Rs. 100 per unit

Mini table:

| Item | Value |
|---|---:|
| Variable cost | 60 |
| Fixed cost/unit | 20 |
| Unit cost | 80 |
| Markup (25%) | 20 |
| Selling price | 100 |

**Suitability/comment:**
- Suitable when costs are stable and products are standardized.
- However, it may be unsuitable if **demand is weak** or competitors offer lower prices; therefore firms should also check elasticity and competition before finalizing price.

Question 15

Explain price discrimination: types (with examples) and one limitation (exam-style with table).

Accepted Answer

### **Price Discrimination: Types, Examples and Limitation**

**Meaning:** Charging **different prices** for the same product/service to different customers/markets based on **willingness to pay**.

#### **Types (with examples)**

| Type | Meaning | Example |
|---|---|---|
| **First-degree** | charge each buyer their maximum willingness to pay | negotiated pricing in some services (rare) |
| **Second-degree** | price varies by quantity/usage block | electricity **slab rates**, bulk discounts |
| **Third-degree** | different prices for different groups/markets | student vs adult ticket, domestic vs foreign pricing |

#### **One limitation**
- It can be viewed as **unfair** and may invite **government regulation** or harm brand image.

**Conclusion:** When segmentation is possible and resale is controlled, price discrimination can increase profit by capturing more consumer surplus.

Pricing Methods and Strategies: Cost-Plus, Value-Based, Skimming, Penetration and Price Discrimination (Basics)

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