The Marketing Mix: Common Pricing Strategies (DP IB Business Management)

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Lisa Eades

Written by: Lisa Eades

Reviewed by: Steve Vorster

Types of Pricing Strategies

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

    • 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

Diagram: the names of common pricing strategies

Firms can use different pricing strategies such as penetration pricing, predatory pricing, cost plus pricing, premium pricing, or a loss leader strategy
Different Types of Pricing Strategies
  • Price is the only element of the marketing mix that relates directly to sales revenue and is vital to a business achieving its sales and marketing objectives

  • Businesses need to select the most appropriate methods of pricing to ensure that they are able to make a profit whilst meeting the needs and expectations of customers

    • A business may use more than one method of pricing across its product range

      • E.g. a large supermarket may offer premium-priced product ranges alongside a selection of loss leaders

Explanation of Pricing Strategies

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

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

Advantages and disadvantages of cost plus pricing

Advantages

Disadvantages

  • A simple and quick method of calculating a price for a product

  • It ensures that a profit is made on each item sold

  • It does not consider the needs of the market 

  • The pricing approach of competitors is ignored

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

Advantages and disadvantages of penetration pricing

Advantages

Disadvantages

  •  Customers are attracted to buy the product at a low price, leading to high sales volume and market share

  • Competitors unable to match or beat the low price may be forced out the market, leading to less competition

  •  Customers may perceive that the product is of low quality if the product is sold at a low price

  • Selling at a low price will limit the amount of profit made

Loss Leader

  • Charging a price below the average cost for a product

  • The aim of this method is to attract customers to buy other profitable products at the same time, making up for losses on the low-priced product

  • It is frequently used by large supermarkets that operate in competitive markets

Advantages and disadvantages of loss leader pricing

Advantages

Disadvantages

  • This is an effective way to attract customers to switch brands

  • Losses may be minimised for businesses that have high levels of stock turnover for loss leader products

  • Smaller rivals may accuse businesses using this method of behaving unfairly

  • If customers do not purchase other goods, the business will make a loss

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

Advantages and disadvantages of predatory pricing

Advantages

Disadvantages

  • This method allows a business to gain a dominant position in the market

  • It acts as a barrier to entry for firms considering selling in the market

  • Use of this strategy may have a negative impact on a businesses reputation

  • It is an expensive strategy for which a business needs sufficient finance to fund

Premium

  • The business sets a high price for its product, which gives customers an impression of high quality and luxury

  • This is effective for designer brands such as Chanel and Ritz Carlton Hotels

  • The high price helps the business differentiate its products from competitors and make high levels of profit

  • Premium pricing should not be confused with price skimming, where a high price is set for a short period at a product's launch

Advantages and disadvantages of premium pricing

Advantages

Disadvantages

  • This method emphasises  exclusivity and improves the value of a brand

  • Premium-priced goods often attract favourable attention from celebrities and the media, reducing the need for promotional activity

  • Large numbers of more price-conscious customers are ignored, which limits sales revenue

  • Premium-priced products require high quality raw materials and components so variable production costs are usually high

Examiner Tips and Tricks

Exam questions frequently ask you to justify the most appropriate pricing strategy. When studying the data provided,  consider the points above and then make a recommendation. For example, in launching a new product into a competitive market, it may be appropriate to use a penetration pricing strategy to attract customers and encourage them to switch brand in order to gain sales and market share quickly.

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Lisa Eades

Author: Lisa Eades

Expertise: Business Content Creator

Lisa has taught A Level, GCSE, BTEC and IBDP Business for over 20 years and is a senior Examiner for Edexcel. Lisa has been a successful Head of Department in Kent and has offered private Business tuition to students across the UK. Lisa loves to create imaginative and accessible resources which engage learners and build their passion for the subject.

Steve Vorster

Author: Steve Vorster

Expertise: Economics & Business Subject Lead

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.