Long Type Questions - Enterprise Marketing, Entrepreneurship, Class 12 | Additional Study Material for Commerce PDF Download

Q1. Lalit introduced a new mobile phone in the market with some innovative features which were liked by the customers. He fixed a very high price for this. Name and explain the method of pricing Lalit had followed. Also, identify and explain the method of pricing ‘when the product is almost of the same quality as those of the competitors’. (CBSE 2012 Comptt.) (6 marks)
Ans. The pricing method which Lalit had followed is :
(i) Skimming Price Method : Skimming Price Method is the method of pricing in which the product is introduced in the market with a very high price. High price is kept for recovering the cost of production quickly. Such entrepreneurs normally bring something new in the market with more utility value. Product is introduced with a lot of expenditure on advertisement. High price tends to bring back revenue quickly, high class people are the target of such method of pricing e.g. Philip introduces its new product with the same method, Amway also follows the same trend.
(ii) Competitive Pricing Method : Competitive pricing is the method of pricing ‘when the product is almost of the same quality as those of the competitors.’ It is also known as Market Rate Method. The management of a firm may decide to fix the price at the competitive level during certain situations. This method is used when the market is highly competitive and the product is not differentiated significantly from the competitive products. This situation resembles the perfect competition under which prices are determined by the forces of demand and supply. There is no product differentiation, buyers and sellers are well-informed about the market price and market conditions, and the seller has no control over the market price. In such a situation, every firm will follow the price which is in the tune with the Market conditions.

Q2. Lina is a small entrepreneur involved in the manufacturing of fans. She finds that the total cost of production of one fan is ` 800. She decided to have a margin of 15% as profit. Determine the sale price of a fan. Name and explain the method of pricing she has followed, stating the advantages and disadvantages of this method. Also, identify and explain the method of pricing when the price is consciously fixed at a low level to cover a large area of market. (CBSE 2012 Comptt.) (6 marks)
Ans. Sale price of a fan = Cost of product + Profit margin
= ` 800 + 15% on ` 800
= ` 800 + ` 120 = ` 920
So, the selling price of a fan would be ` 920.
The method of pricing which Lina had followed is :
Cost plus pricing method : Under this method, the price of a product is fixed to cover the total cost of production with a reasonable margin of profit.
Price = Cost of production + Profit margin
Cost of production must include all fixed and variable costs incurred in the process of production. Cost per unit is calculated by dividing the total production costs by the numbers of units produced.
Advantages :
(i) It is easy to calculate the selling price of a product.
(ii) The price can be changed or adjusted according to the changes in the costs.
Disadvantages :
(i) It does not take into account demand conditions and other environmental factors.
(ii) It does not account for competitors actions and their effect on pricing of the product.
(iii) It can result in the company overestimating the price of a product.
The method of pricing when the price is consciously fixed at a low level to cover a large area of market is :
Penetrating price policy : Penetration pricing is the method of pricing in which the entrepreneur introduces its product in the market with low price compared to competitors. The low price increases the sale of the product tremendously. Normally, for keeping low price, the profit margin is normally kept very low. The product thus, captures the major part of the market.

Q3. Give advantages and disadvantages of Cost Plus Pricing Method. (6 marks)
Ans.
Advantages :
(1) Easy : This method of pricing is a very simple method. It can easily be used for determining the price.
(2) Flexible : Any changes in the cost of production or the margin of profit changes the price in the same direction.
It automatically gets adjusted to the change.
(3) Visible Profit Margin : Profit margin is not to be calculated, it is already fixed. Thus, by multiplying the profit per unit with the volume of the product, the total profit can be determined.
(4) Increases Efficiency : Any upward rise in cost is easily visible. This provides an idea to the entrepreneur to adjust his production for keeping the cost as low as possible.
(5) Less Calculation : Comparatively less calculation are involved, which makes the implementation of this method simple.
(6) Easy implementation : This method can easily be implemented because of its simplicity to understand and easy calculations.
Disadvantages :
(1) Suitable only for Single Product : A firm involved in production of only one type of product finds it convenient.
In case the firm decides about variation, then this method cannot be successfully used.
(2) Could Neglect the Competitive Price : In case the sum of cost price and profit is more then the competitive price, then the sale of the product will be low.
(3) Consumers preference : It is not considered while fixing the price by this method. This method does not provide much scope for selling the product discriminately to different group of customers.

Q4. What is Skimming Pricing Method ? What are its advantages and disadvantages ? (2006 CBSE A. I.) (6 marks)
Ans. Skimming Price Method is the method of pricing in which the product is introduced in the market with a very high price. High price is kept for recovering the cost of production quickly. Such entrepreneurs normally bring something new in the market with more utility value. Product is introduced with a lot of expenditure on advertisement. High price tends to bring back revenue quickly, high class people are the target of such method of pricing e.g. Philip introduces its new product with the same method, Amway also follows the same trend.
Advantages of Skimming Price Method :
(1) High Recovery : The cost of production and investing can be recovered quickly by this method.
(2) Quality Product : Such method is applicable mainly to quality product. The entrepreneur is thus able to sell quality product.
(3) Encourages Innovation : Any innovation idea about product can be quickly introduced by such method. Hence, entrepreneur normally are in search of innovations. Thus, innovation is encouraged.
Disadvantages of Skimming Price Method :
(1) High Promotional Cost : In this method, there is heavy expenditure on advertisement and other promotional techniques. All the entrepreneurs may not have such financial strength.
(2) Short Run : This method is applicable only till the competitors are not entering. As the competitors enter, the price skimming method cannot be introduced for normal goods.

Q5. How does the penetration price method of pricing facilitate in expanding the market ? (5 marks)
Ans. Penetration price method of pricing is one in which the price of product is kept lower than the original price of the product with minimal of profit. This method facilitates in expanding the market because the main aim of enterprise is to penetrate into the market covering large area by attracting as many customers as possible. The sale is expected to have high turnover, bring high returns on investment and the necessary profit.

Q6. Puremminds Ltd. was a company into manufacturing of water purifiers, water dispensers, packaged driving water and hand senitizers. They do a lot of research and development and would update their product on a regular basis. They also encouraged feedback and suggestions from the customers. Acting on one suggestion, they decided to manufacture a water bottle with a built-in water purifier called “Wonderpure”. They spent a lot of money on promoting the product with the tagline “Your child is secure with Wonderpure.” The target segment was quality conscious consumers. It was priced in such a way that the cost of investment of the original research gets recovered from the customer. The product was an instant hit.
(a) Identify and explain the pricing strategy to be used by Puremminds Ltd.
(b) State two advantages and two disadvantages of the pricing strategy identified in part (a). (SQP) (6 marks)
Ans.
(a) Price skimming method : In this technique the company charges a higher price for their products so that the initial cost spent on research and development can be recovered.
(b) Advantages : Helps in recovering research and development costs catering to quality conscious customers.
Disadvantages : The product will not sell if competitors introduce similar products at a less price; it is not a available option if there are strict legal and government regulations; if the company has a history of introducing products on skimming method, customers will not be interested to buy as they are aware that the price would eventually come down. (Any two)

Q7. What is penetration pricing method ? Enlist its advantages and disadvantages. (TBQ) (6 marks)
Ans. Penentration pricing is a method where the price of a product is initially set at a lower price than the eventual market price to attract new customers.
Advantages :
(i) It discourages the entry of competitors.
(ii) It can create high stock turnover throughout the distribution channel.
(iii) It helps in covering a large area.
Disadvantages :
(i) Low profit margins may not be sustainable long enough for the strategy to be effective.
(ii) It establishes long-term price expectations for the product and image preconceptions for the brand and company.

Q8. What are the factors to be kept in mind while fixing the price of a commodity or service ? (6 marks)
Ans. Factors to be kept in mind while fixing the price of a commodity or service are :
(i) Pricing objectives : What is the objective of firm is a very important factor which helps in deciding the price.
If the objective of company is profit maximization then generally high prices are fixed. If the objective is sales maximization then prices are kept low. If the firm wants to capture big share in the market then it has to keep its price low so that more number of people are attracted to purchase the product. If the firm has to survive in a competitive market then it has to keep its price low by offering discounts.
(ii) Product cost : The price should be fixed in such a manner that it is able to cover the product cost. Product cost comprises of fixed cost and variable cost. Fixed cost remains constant irrespective of change in output whereas variable cost varies with change in output. In case of a competitive market, price should be so fixed that it is able to atleast cover the variable cost.
(iii) Extent of competition in market : When a firm does not face any competition then it can enjoy complete freedom in fixing the price. But when the competition is more then price is fixed keeping in mind the price of competitor’s product. For example : Pepsi company cannot fix the price of its drinks without considering the price of Coke.
(iv) Customer’s demand and utility : When demand of a product is inelastic then the company can fix up high prices but if the demand is elastic then the price has to be brought down. If the product is highly demanded than high prices can be fixed but in case of less demand low price have to be fixed. If product is offering higher utility then high price can be charged from customer as customer is ready to pay more. Whereas if utility is low, high price cannot be charged.
(v) Government and legal regulations : To protect the interest of general public, the government has all the right to control the prices of various products and services by including the products in the category of essential commodities. With government intervention there can be a check on monopolist as they cannot charge unfairly high price for essential commodities.
(iv) Marketing methods used : The price of the product also gets affected by various techniques of methods of marketing used to promote the products. If company is using intensive advertising to promote the sale of product then it will charge high price. Other marketing methods which affect price of a product like type of packing, salesman employed, customer support services, etc.