Pricing Decisions (AQA AS Business): Revision Note

How much it takes to make, distribute and sell the product

A price must at least cover the unit cost, or the firm loses money

High fixed costs (aircraft, fuel) push airlines such as Ryanair to fill every seat and use "from £29” teaser fares; even a small rise in fuel triggers quick ticket‑price adjustments

How sensitive buyers are to a price change (see the Elasticity of Demand revision note)

Elastic demand means a small price rise could lower sales, so firms keep prices low and use promotions

Inelastic demand gives room for higher prices

H&M rarely raises the price of basic t-shirts because its teenage customers can switch to Primark easily

Nintendo held the Switch console near its launch price for years, knowing loyal gamers would still pay

The marketing message needs to be consistent

Premium features and luxury branding justify higher prices

Selling through discount stores often requires lower prices, while selling in boutiques allows for premium pricing

Offer-focused advertising can give customers an expectation of a bargain, restricting future price rises

Dyson’s Airwrap hair‑styler is priced at around £450 because its engineering, brand reputation and sleek design back the premium price

Gillette often discounts razor handles but prices blades high, knowing users will keep buying refills

Rapid sales growth and market share

• A low launch price tempts customers to try the product immediately, building a large customer base before rivals respond

Deters new entrants

• Potential competitors see low profits and may decide the market is not worth entering

Low profit margins at the start

• Very little is earned on each unit, so it needs to sell in high volumes to break even

Difficulty raising prices later

• Customers can feel misled if prices rise sharply, which may damage trust

Quick recovery of research and development costs

• High profit margins help pay back expensive design or technology investments quickly

Creates a prestige image

• The initial high price signals exclusivity and high quality, helping the brand stand out

Attracts rivals

• Once the price drops, competitors with cheaper versions may enter and reduce market share

Slower mass adoption

• Budget-conscious consumers wait for later price cuts, delaying sales

Simple to calculate and explain

• Managers need only accurate cost data and a chosen markup, so small firms do not need pricing specialists

Ensures profitability

• As long as costs are correctly measured, every sale contributes a predictable amount to profit

Ignores customer and competitor factors

• The price may end up too high for demand or too low to match rivals, missing out on potential revenue

Overpricing risk in elastic markets

• Where buyers are price‑sensitive, even a modest markup could push them towards cheaper substitute products

Maximises revenue in real time

• Prices rise when demand is strong and fall to stimulate sales when demand is weak, smoothing overall income

Helps manage limited capacity

• For airlines or ride‑sharing, higher prices at peak times ration scarce seats or cars to those who value them most

Perceived unfairness or unpredictability

• Customers may feel exploited if prices surge suddenly, harming brand reputation and loyalty

Requires advanced data systems and constant oversight

• Setting up algorithms and monitoring performance adds complexity and cost