Pricing Strategy (Edexcel A Level Business)

Cost plus

• The business calculates the cost of production and then adds a markup to determine the final price
• The markup covers the cost of production plus the business's desired profit margin
• The formula to calculate the cost-plus price is

• This pricing strategy is simple and is commonly used by manufacturers that produce standardised goods e.g. washing machines

Price skimming

• The business sets a high price for a new product/service when it is first introduced to the market
• This is effective when an established brand is introducing a new product and there is a high demand for it e.g successive models of Apple's Macbook Air
• The high price helps the business to recover its development and marketing costs quickly
• The business will then gradually lower the price to ensure sales continue

Penetration

• The business sets a low price for a new product/service when it is first introduced
• This is effective when a business wants to quickly capture market share and attract price-sensitive customers e.g. many new perfumes launch using penetration pricing
• Once they have enough customers, the business will start to raise the price

Predatory

• The business sets prices so low that it drives its competitors out of the market
• This strategy is illegal in many countries as it is considered anti-competitive and harms customers by reducing choice in the market

Competitive

• The business sets its prices based on its competitors' prices
• This is effective when a business is in a highly competitive market and wants to maintain its market share
• The business must continually monitor its competitors' prices and adjust its prices accordingly to remain competitive

Psychological

• This pricing strategy takes into account the customer's emotions, beliefs, and attitudes towards the product/service E.g. a business may set its prices at £9.99 instead of £10 as customers perceive the former as a better value

• Products with many USPs and high differentiation can command higher prices
• E.g Dyson vacuum cleaners have unique features which allow the company to charge a premium price

• A business needs to consider the price elasticity of demand when setting its prices
• E.g If a business is in a highly competitive market with many substitutes, lowering prices will increase revenue
• Businesses should set lower prices If the product is price elastic
• Businesses should set higher prices If the product is price inelastic

• In highly competitive markets businesses may need to set their prices low to remain competitive
• E.g. The budget airline industry is highly competitive and airlines keep their prices low to increase demand
• In less competitive markets, businesses may be able to set higher prices

• A strong brand with a loyal customer base can command higher prices
• E.g. Nike's strong brand allows it to charge premium prices for its athletic shoes and apparel

• In the introduction stage, prices may be set lower to attract customers and build market share
• In the growth stage, prices can increase as demand for the product increases
• In the maturity stage, prices may need to be lowered again

• Prices must cover the cost of production and provide a reasonable profit margin
• E.g. A restaurant needs to consider the cost of ingredients, labour, rent, and other expenses when setting menu prices