Measuring the potential success of a business idea

HideShow resource information
What is a pricing strategy?
The way in which a business decides upon the price of its product or service.
1 of 20
What does a companies pricing strategy depend on?
The level of competition, What competitive advantages the business has, are there any attractive or distinguishing features, is there any differentiation. Is the economy growing.
2 of 20
What is competitive pricing?
Looking at competitors prices and making yours similar or slightly less. Often done with two similar products.
3 of 20
What is cost plus pricing?
Price is decided by calculating how much percentage profit the business wants which is then added to the total cost of producing the product.
4 of 20
What is penetration pricing?
A lower price than the competition is set to persuade customers to try the new product. The aim is to gain market share, after which the price will probably increase.
5 of 20
What is premium pricing?
A higher price is charged because the product is seen as being higher quality or more desirable. May not work for new unknown businesses.
6 of 20
What is price skimming?
Charging a very high initial price. Only works for really new and different products. Deand will be high because people want a unique product. The entrance of more competitors will decrease prices.
7 of 20
What is predatory pricing?
Setting the price below the level of production to drive the competition out of the market. It is illegal in the UK.
8 of 20
What are fixed costs?
Costs that do not change with output.
9 of 20
What are variable costs?
Costs that change with output
10 of 20
What is the break even point?
The level of output at which the total revenue is exacly the same as the total costs. Neither a profit or loss is made.
11 of 20
What is the formula for calculating breakeven?
Fixed costs/Contribution(P-VC)
12 of 20
What is contribution?
The difference between the price of a product and its variable costs. Once a sale is made the contribution can help pay off fixed costs.
13 of 20
What is margin of safety?
The difference between the actual level of output compared to the breakeven level.
14 of 20
What are the strengths of breakeven analysis?
Helps to assess the strength of a business idea, helps assess the levels of output needed to make a profit, shows impact of changes in price on the BEP and profit, can calculate profit for different levels of output, supports finance applications.
15 of 20
What are the weaknesses of break even analysis?
Model assumses costs rise steadily- bulk buying may reduce costs, assumes all output is sold, only a forecast and estimate with may be wrong, knowing the BEP doesn't mean you will sell that amount, markets are dynamic- estimates can be spoilt
16 of 20
What is gross profit?
Turnover minus variable costs
17 of 20
What is operating profit?
Gross profit minus fixed costs.
18 of 20
What are profit margins?
Tells what percentage of the sales is actually profit.
19 of 20
What is the formula for calculating the Gross/operating profit margin?
(Profit/Turnover)x100
20 of 20

Other cards in this set

Card 2

Front

What does a companies pricing strategy depend on?

Back

The level of competition, What competitive advantages the business has, are there any attractive or distinguishing features, is there any differentiation. Is the economy growing.

Card 3

Front

What is competitive pricing?

Back

Preview of the front of card 3

Card 4

Front

What is cost plus pricing?

Back

Preview of the front of card 4

Card 5

Front

What is penetration pricing?

Back

Preview of the front of card 5
View more cards

Comments

No comments have yet been made

Similar Business Studies & Economics resources:

See all Business Studies & Economics resources »See all Measuring the potential success of a business idea resources »