IB Business Management SL 4.5.3 Pricing methods Question Bank
Practise IB Business Management SL/HL 4.5.3 by applying pricing methods concepts to exam-style questions.
- Syllabus
- First assessment 2024
- Course
- Business management SL
- Level
- SL
Exam points
- identify the relevant model, concept or evidence
- apply the correct subject framework to the question
- evaluate the result using clear evidence and subject terminology
4.5.3—Pricing methods question 1
[Maximum number: 4]
Secco Vineyards (SV)
Secco Vineyards (SV) is a family-owned business producing wine in Sonoma, California. In 1947, SV opened using cost-plus (mark-up) pricing. For SV's customers, the wines were medium priced and available in local grocery stores.
In 1977, Joe Secco, grandson of the founder, created a new strategy. He re-branded SV's wine for a niche premium market.
- SV began to sell directly to customers at its winery instead of in local grocery stores.
- SV stopped using cost-plus (mark-up) pricing and began to sells its wines at much higher prices than before.
- Regular wine tastings and promotional events were held at its winery. At these events, wine experts would promote SV's wines by creating an elegant experience based on a luxurious culture of wine consumption: stylish wine glasses, classical music and food that complements the wine.
However, SV has recently faced intense competition and sales have fallen. Local wine producers and overseas competitors have entered the market with similar market positioning. In order to maintain its brand image, S V has not changed its pricing strategies.
SV conducted secondary market research about other possible markets in the US for its premium wines. The research suggested that other possible markets for high-quality wines, such as those of S V, exist. As a result, S V is considering two options to increase sales in addition to its current distribution channel:
- Option 1: open a business-to-consumer (B2C) e-commerce store
- Option 2: sell SV wines to wholesalers serving the whole of the US market for premium wines.
Given the intense competition, explain two pricing strategies SV might consider.
Pricing strategies that SV might consider include:
- Cost-plus (mark-up) - SV may want to return to this pricing strategy, which guarantees that for each bottle of wine it sells the business is covering its per unit costs. However, SV's brand identity might suffer if it lowered prices.
- Penetration - SV could use this pricing strategy as it enters new markets. Penetration pricing would allow SV to attract first-time customers in new markets with lower-than-normal pricing. Once some brand loyalty develops, SV could then raise prices.
- Psychological - Whereas psychological pricing sometimes refers to pricing below certain thresholds ($9.99 rather than $10.00) for a psychological effect, another form of psychological pricing is pricing a product high as a way of suggesting that the product is of high quality or value. SV might try to strengthen its brand identity with psychological pricing along this line, especially as the competition is intense.
- Loss leader - SV could try a loss-leader strategy, whereby it sells one of its wines at very low prices in an attempt to get consumers to buy SV wines. Other varieties of SV wines, however, would be priced in a fashion to compensate for the losses on the one type. This strategy, like others involving attracting customers through low prices, could weaken SV's brand identity.
- Price discrimination - SV might consider is price discrimination, where SV sets the prices based upon the market that it is entering. For example, SV might charge more for wines in New York City than in Charlotte, NC. Both cities (major banking centres in the United States) have upscale buyers. Nevertheless, prices of virtually all types of goods and services cost less in Charlotte than in New York.
- Premium pricing - Though premium pricing is not in the guide, candidates are free to use it if they wish. Premium pricing occurs when a business inflates its prices precisely to enhance brand value. Consumers think that, by paying more, they are getting a better product.
- Promotional pricing - setting pricing very low for a short period to get customers to buy your product, often for the first time.
- Value-based pricing - setting a price based upon what consumers perceive the value of the product to be rather than on the actual cost to produce.
Accept other pricing strategies as long as there is a clear indication of why this may be acceptable to SV. Do not accept predatory pricing.
N.B. Candidates must actually name pricing strategies. "Lowering prices" and "Increasing prices" are not pricing strategies.
Mark as 2+2.
Award [1] for each appropriate pricing strategy explained and [1] for application to the stimulus.
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