Model Answers

Costs of advertising is a business cost and if this cost decreases, overall business costs would decrease with it. To cause a rise in pasta prices, the cost of advertsising would have to increase. This means C is not likely to explain a price increase in pasta. A Subsidy is a form of grant given by the governemnt to producers in order to rise output and reduce production costs. D is therefore incorrect as a reduction in subsidies would explain a rise in pasta prices. Also, A, as producers are switiching to an alternative products, this would reduce the supply of wheat causing the prices of wheat required to make pasta to increase. Ths means A is also incorrect.

Use the case study below to answer the following question:

Bliss Conceptions

Bliss Conceptions is a small business that operates at home and has been in business for about a year. The company specializes in a variety of handmade gifts and keepsakes such as birthdays and weddings. These include wooden names, candles, signature books and invitations. The owner of Bliss Conceptions, Jodie, is wanting to expand her customer base and has decided to invest in the assistance of a upscale marketing consultant to help Bliss Conceptions get it’s products to a larger market. The marketing consultant suggested that Jodie does some market research to find out prices of her competitors to avoid loss of demand with higher prices then leading competitors in the handmade and keepsake market.

Evaluate the likely value of penetration pricing to Bliss Conceptions in their expansion  (8 marks)

Penetration Pricing is when a business such as bliss conceptions, enters their products in the market with a lower price than anticipated to try and gain as much demand for the product as possible and attract customers. Penetration pricing will help Bliss Conceptions enter the market selling keepsakes and wooden names at a lower price to competitors. This will then generate demand for Jodie’s products and to be able to keep up with the low market price, it will enable Bliss Conceptions to focus on minimising unit costs right from the start. Jodie would have also encouraged word-of-mouth recommendation for her candles and cards because of the attractive pricing. However, with the use of penetration pricing, Jodie may struggle to keep production costs low enough to still make a profit when entering the market with low prices. Jodie may not be able to get cheaper supplies such as glue, ribbon and paint and may be forced to may a loss in order to gain a profit in the future. Jodie also undertook market research which means that the results of her market research would also determine whether or not her pricing strategies would have to change to suit the prices of competitors. Therefore, even though price penetration is useful for Jodie to gain enough demand in expanding, price penetration will only be useful if her market research has concluded that lower prices are needed to compete with other keepsake and crafts businesses already established.