A LevelBusinessEdexcelRevision Notes1. Marketing & People1.3 Marketing Mix & StrategyPricing Strategy

Pricing Strategy (Edexcel A Level Business): Revision Note

Exam code: 9BS0

Steve Vorster

Written by: Steve Vorster

Reviewed by: Jenna Quinn

Updated on

Types of pricing strategies

  • A pricing strategy is the approach a business adopts to set the price of a product or service in order to achieve a specific objective

  • Choosing the right pricing strategy is essential for a business to be profitable, competitive and successful in the long run

Common pricing strategies

Diagram of pricing strategies, including cost plus, price skimming, penetration, psychological, competitive and predatory, linked to a central box.
Businesses can choose from cost-based, competitor-based or customer-based pricing strategies, depending on their objectives

Explanation of pricing strategies

Pricing strategy

 Explanation

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:

Unit cost + (Markup percentage × Unit cost)

  • This pricing strategy is simple to calculate

  • It 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 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 it has 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, including the UK, 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

  • For example, a business may set its prices at £9.99 instead of £10, as customers perceive the former as better value

Worked Example

A furniture retailer has a unit cost of £80 for a chair and applies a mark-up of 25%

Calculate the cost-plus selling price of the chair

Step 1: Calculate the mark-up amount

£80  × 0.25 = £20

Step 2: Add the mark-up to the unit cost

£80 + £20 = £100

  • The cost-plus selling price of the chair is £100

Factors influencing the choice of pricing strategy

  • By understanding their customers, competitors and costs, businesses can set prices that maximise revenue and profitability

  • Pricing can play a significant role in positioning the brand in the market and help a firm to compete effectively

  • A business needs to consider various factors when setting its pricing strategy

    • Understanding these factors can help a business make informed decisions about its pricing and increase its chances of success

Factors to consider when choosing a pricing strategy

Number of USPs/amount of differentiation

  • Products with many USPs and high differentiation can command higher prices

  • For example, Dyson vacuum cleaners have unique features that allow the company to charge a premium price

Price elasticity of demand

  • A business needs to consider the price elasticity of demand when setting its prices

  • For example, 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

Level of competition

  • In highly competitive markets, businesses may need to set their prices low to remain competitive

  • For example, 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

Strength of the brand

  • A strong brand with a loyal customer base can command higher prices

  • For example, Nike's strong brand allows it to charge premium prices for its athletic shoes and apparel

Stage in the product life cycle

  • 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

Costs and the need to make a profit

  • Prices must cover the cost of production and provide a reasonable profit margin

  • For example, a restaurant needs to consider the cost of ingredients, labour, rent and other expenses when setting menu prices

Examiner Tips and Tricks

Exam questions frequently ask you to be able to justify the most appropriate pricing strategy for a good or service.

When studying the data provided, consider the points above and then make a recommendation.

For example, in launching a new product with a strong brand identity, it may be appropriate to use a price skimming strategy to recover research and development costs.

  • Both online sales and price comparison sites have had a significant impact on pricing strategies

  • Retailers must continually adapt to remain competitive in these markets

Online sales

  • Online sales offer customers convenience and 24/7 accessibility

  • Retailers have shifted their focus to online sales and adjusted their pricing strategies

  • One way that pricing has changed to reflect this trend is through the use of dynamic pricing

    • Retailers can adjust prices in real time based on factors such as demand and competition

    • Prices are higher when supply is lower and vice versa

  • Retailers may also offer different prices for online purchases compared to in-store purchases to incentivise customers to shop online, which may mean the retailer requires fewer physical stores

    • This will reduce the retailer's costs

Price comparison websites

  • Retailers have had to adjust their pricing strategies to remain competitive in an online marketplace where customers can easily compare prices

    • e.g. A price comparison website like comparethemarket.com

  • Pricing has changed to reflect the rise in price comparison through the use of price-matching policies

    • Retailers now offer to match the prices of their competitors to prevent customers from switching to a competitor with a lower price

  • Retailers may also use pricing algorithms to monitor the prices of their competitors and adjust their prices automatically

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Steve Vorster

Author: Steve Vorster

Expertise: Content Creator

Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.

Jenna Quinn

Reviewer: Jenna Quinn

Expertise: Content Creator

Jenna studied at Cardiff University before training to become a science teacher at the University of Bath specialising in Biology (although she loves teaching all three sciences at GCSE level!). Teaching is her passion, and with 10 years experience teaching across a wide range of specifications – from GCSE and A Level Biology in the UK to IGCSE and IB Biology internationally – she knows what is required to pass those Biology exams.