Pricing Products Questions and Answers [With PDF]
Set the price too high and customers walk away. Set it too low and the business loses money. Pricing is one of the most important decisions in marketing, because price is the only element of the marketing mix that brings in revenue. This chapter covers what price is, what influences it, the main pricing methods with worked examples, and the common price adjustment strategies. Here are 25 important questions with clear answers and checked calculations, ready for exams, vivas and interviews.
This is Chapter 7 of our Marketing course. It follows Product and comes before Product Distribution Channel.
Meaning, Importance and Objectives
Q1. What is price?
Price is the amount of money a buyer pays to get a specific quantity of a good or service. It is the value of the product expressed in money, and paying it transfers ownership to the buyer.
Q2. What is the importance of price in marketing?
- It decides the firm’s revenue and profit.
- It helps the firm reach its objectives.
- It affects demand: higher price generally means lower quantity demanded.
- It signals quality and status to customers.
- It is a tool for competing in the market.
- It affects the image of the product and the company.
- It must fit with the product, promotion and distribution decisions.
Q3. What is pricing?
Pricing is the process of deciding what price a firm will charge for its product or service.
Q4. What are the objectives of pricing?
| Type | Objectives |
|---|---|
| General | Survival, product quality leadership |
| Profit-oriented | Profit maximization, a target return on investment, healthy cash flow |
| Sales-oriented | Higher sales volume, larger market share |
| Status quo | Meet competition, keep prices stable, protect the company’s image |
Factors Affecting Pricing
Q5. What factors affect pricing decisions?
| Internal factors | External factors |
|---|---|
| Marketing objectives | Market and consumer demand |
| Marketing mix strategy | Competitors’ costs, prices and offers |
| Costs | Government policy and regulation |
| Pricing policy | Social responsibility |
| The country’s economic conditions |
Q6. How does the marketing mix affect pricing?
Price is one of the four tools of the marketing mix, so it must fit with product design, distribution and promotion. For example, a firm that depends on many middlemen to promote its product must allow for higher middleman margins in its price. A premium product with a luxury image needs a premium price.
Q7. How do costs affect pricing?
Costs set the floor: the lowest price at which the firm can sell without making a loss. The price should cover the cost of making, distributing and selling the product and give a fair return on investment. A firm with lower costs can charge lower prices, win more sales and still earn a profit.
Q8. How do the market and demand affect pricing?
Costs set the lower limit of the price, and market demand sets the upper limit. Buyers compare the price with the benefits of owning the product. The marketer must therefore understand how demand responds to price: if demand is elastic, a small price rise may sharply cut sales, and if it is inelastic, a price rise has little effect on quantity bought.
Q9. How does the environment affect pricing?
- The economy: boom, recession, inflation and interest rates affect costs and customers’ view of value.
- Middlemen: prices must leave them an acceptable profit.
- The government: price controls, taxes and subsidies.
- Society: short-term profit goals may have to give way to broader social interests.
Setting the Price
Q10. What are the steps in setting a price?
- Choose the pricing objective.
- Study the target market’s price perception and buying power.
- Estimate demand.
- Estimate the costs.
- Analyse competitors’ costs, prices and offers.
- Choose a pricing method.
- Decide the final price.
Q11. What are the pricing methods?
| Method | Based on |
|---|---|
| Cost-based pricing (cost-plus and break-even) | The firm’s costs |
| Competition-based pricing (going-rate and sealed-bid) | Competitors’ prices |
| Value-based pricing | Buyers’ perception of value |
| Demand-oriented pricing | The level of demand |
Q12. What is cost-plus pricing, and how is it calculated?
Cost-plus (markup) pricing is the simplest method: add a standard markup to the cost of the product.
Example: A soap maker has a variable cost of 6 per unit, fixed costs of 200,000 and expects to sell 100,000 units.
| Step | Calculation | Result |
|---|---|---|
| Unit cost = variable cost + fixed cost / units | 6 + (200,000 / 100,000) | 8 |
| Markup price = unit cost / (1 – desired profit on sales) | 8 / (1 – 0.20) | 10 |
| Profit per unit | 10 – 8 | 2 |
The firm charges 10 per unit and earns 2 per unit, which is 20 percent of the selling price. Its weakness is that it ignores demand and competition.
Q13. What is break-even pricing (target profit pricing)?
A cost-based method in which a firm finds the price, or the sales volume, at which it just covers its costs, or reaches a target profit.
Break-even volume = Fixed cost / (Price – Variable cost). Using the soap example at a price of 10: 200,000 / (10 – 6) = 50,000 units. To earn a target profit of 100,000: (200,000 + 100,000) / 4 = 75,000 units.
Q14. What is going-rate pricing?
A competition-based method in which a firm bases its price mainly on competitors’ prices, charging the same as, or slightly more or less than, the market leader. The firm’s own costs or demand count for less. It is very popular, especially where products are similar.
Q15. What is sealed-bid pricing?
Used when companies compete for a contract through secret bids. The firm sets its bid by guessing what competitors will bid, not only by its own cost or demand. It wants to win the contract, so it bids lower than rivals, but it cannot bid below its costs, because that would cause a loss. The higher its bid, the lower its chance of winning.
Q16. What is value-based pricing?
Setting the price according to the value that buyers perceive in the product, rather than the seller’s cost. The firm first decides what customers will pay for the benefits, and then designs the product and its costs to fit that price.
Q17. What are price skimming and penetration pricing?
| Point | Price skimming | Penetration pricing |
|---|---|---|
| Initial price | High | Low |
| Aim | Earn high profit from early buyers, then lower the price over time | Win a large market share quickly |
| Works when | Product is new and unique, with a segment willing to pay more | Market is price-sensitive and low prices keep competitors out |
| Example | A new smartphone model at launch | A new brand of noodles at an introductory price |
Price Adjustment Strategies
Q18. What are the price adjustment strategies?
- Discounts and allowances
- Segmented pricing
- Psychological pricing
- Promotional pricing
- Geographical pricing
- Dynamic pricing
Q19. What are the kinds of discounts and allowances?
| Type | Given for |
|---|---|
| Cash discount | Paying promptly |
| Quantity discount | Buying in large quantities |
| Trade (functional) discount | Services of wholesalers and retailers |
| Seasonal discount | Buying out of season |
| Allowance | Trade-in of an old product, or promotional help from dealers |
Q20. What is segmented pricing?
Charging different prices for the same product or service to different segments, when the difference is not based on cost. Types:
- Customer-segment pricing: students and seniors pay less.
- Product-form pricing: different versions at different prices.
- Location pricing: a front-row seat costs more.
- Time pricing: peak and off-peak rates.
Q21. What is psychological pricing?
Pricing that considers how buyers feel about a price, not only the economics. A high price can suggest high quality, which is why luxury goods are priced high. “Odd pricing” uses prices just below a round number: a product at 499 instead of 500 looks like it belongs in the 400s, so it seems noticeably cheaper even though the difference is tiny.
Q22. What is promotional pricing?
Temporarily pricing products below the normal price to attract customers and increase short-term sales. Techniques include:
- Loss-leader pricing: selling a popular item at or below cost to bring shoppers in.
- Special event pricing, such as festival sales.
- Low-interest financing.
- Warranties and service contracts.
- Cash rebates.
- Longer payment terms.
Q23. What is geographical pricing?
Setting prices for customers in different places. The firm decides whether to charge everyone the same price (uniform delivered pricing), to add transport costs by distance (zone pricing) or to quote a price at the factory gate and let the buyer pay transport (FOB pricing).
Q24. What is dynamic pricing?
Adjusting prices continually to suit the needs and situation of individual customers or the market at that moment. Examples: airline tickets and ride-hailing fares that rise when demand is high.
Q25. How does price elasticity of demand affect pricing?
Price elasticity of demand shows how much quantity demanded changes when price changes. If demand is elastic (for example luxuries with many substitutes), a price cut raises revenue. If demand is inelastic (for example salt or essential medicine), a price rise raises revenue. Marketers estimate elasticity before changing a price.
Quick Revision Points
- Price is the only mix element that earns revenue. Costs set the floor, and demand sets the ceiling.
- Cost-plus: unit cost = variable cost + fixed cost / units. Markup price = unit cost / (1 – desired profit on sales).
- Break-even volume = fixed cost / (price – variable cost).
- Skimming: high price first. Penetration: low price first.
- Psychological pricing: 499 looks like it is in the 400s.
Test yourself with the chapter quiz below, then read the last Marketing chapter, Product Distribution Channel.
