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Business Studies · Oct / Nov 2021 · Paper 22 · Question 3

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  • 3(a)[8]

    Explain one cost and one benefit for PPE of developing a new product. Award one mark for a cost/benefit (maximum of 2 marks). Award a maximum of 3 additional marks for each explanation of the cost/benefit of developing new products – one of which must be applied to this context. Costs might include:

    Costs of carrying out market research - to research the target market - to identify the size of the potential sales
    Costs of product development / producing trial products - produce prototype - cost of materials and components for trial products / time- consuming
    Risk of failure of the business if the product is unsuccessful – due to lack of sales giving no revenue
    May damage image of the business and other brands if product is unsuccessful Benefits might include:
    Unique Selling Point [USP] may give business a competitive advantage – consumers may think the business produces up-to-date products – making them more popular than competitors that are seen as old fashioned
    The business will have a more diversified range of products – spreads risk – reduces chances of business failure if one product fails
    May attract more customers – increase sales
    Business may expand into new markets - increases sales
    Business may expand in existing markets For example: There may be high costs of carrying out market research (1)

    to find out what customers want from a new product. (1)

    This is needed when developing a new piece of playground equipment (app) to ensure it will be attractive to children and therefore be more likely to sell. (1)

    Application could include: wooden playground equipment;

    children’s playgrounds;

    sole trader;

    job production;

    individually designed playground equipment;

    3 skilled workers;

    cost-plus pricing;

    fully tested to meet legal safety standards;

    parents want to have playground equipment at home;

    many competitors;

    no other similar products in the market. Question Answer

  • 3(b)[12]

    Consider the following three pricing methods PPE could use when launching its new product. Which pricing method should it use? Justify your answer.

    Cost-plus
    Penetration
    Skimming Level Description Sound application of knowledge and understanding of relevant business concepts using appropriate terminology. Detailed discussion of two or more methods. Well-justified recommendation. Candidates discussing all three methods in detail, in context and with a well-justified recommendation including why the alternative methods were rejected should be rewarded with the top marks in the band. 9–12 Sound application of knowledge and understanding of relevant business concepts using appropriate terminology. Detailed discussion of at least one method. Judgement with some justification / some evaluation of choices made. Candidates discussing two or more methods in detail and applying it to the case should be rewarded with the top marks in the band. 5–8 Limited application of knowledge and understanding of relevant business concepts. Limited ability to discuss the methods with little/no explanation. Simple judgement with limited justification / limited evaluation of choices made. Candidates outlining three methods in context should be rewarded with the top marks in the band. 1–4 No creditable response. Question Answer Relevant points might include: Advantages Disadvantages Cost-plus
    Easy to apply to individually produced playground equipment
    Can have different mark-up in different markets
    Each product makes a profit for the business
    The costs of producing the new product may be high and so the price of the final product may be too high to be competitive – loses customers – as there are many competitors
    Profit will only be made if sufficient playground toys are sold to break-even
    May not give the brand image of the high-quality product
    Time is taken to research and calculate cost prices
    No incentive to reduce costs Penetration pricing
    Low price attracts customers and increases sales of playground equipment
    Helps to ensure a successful launch into a new market
    Quickly builds market share
    Low price will mean low profit per unit
    Customer may expect prices to remain low and therefore not purchase the toys when the price is raised at a later date
    Consumer may think low price is due to low-quality product Question Answer Advantages Disadvantages Skimming
    Customer may think the playground equipment is of high quality
    High research and development costs will quickly be recovered
    The product is new and unique on the market, then high prices may be paid by customers leading to high profits before competitors produce a similar product
    High price may put off potential customers
    The high price and possible high profit per item of playground equipment may encourage competitors to quickly enter the market taking away its advantage of being first with the new product Recommendation
    Cost-plus pricing as the product is new so there are no other competitors to compare prices and at least this ensures that a profit is made per unit sold. Price skimming may be too high an initial price and therefore there would be low sales and penetration pricing may not result in any profit if too low.
    As the product is new then penetration pricing might be the best one to choose to get the playground equipment established in the market. There are other playground products being sold and so it will get this product well known.
    Skimming because Kaari wants to create an image of high quality for the new playground toy and this is emphasised in the advertisement in Appendix 1. Question Answer
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