Price: Types of Pricing Methods (Cambridge (CIE) IGCSE Business): Revision Note

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 sales revenue and profits

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

The main pricing strategies

1. Cost plus pricing

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

2. Price skimming

• The business sets a high price for a new product or service when it is first introduced to the market

• The business will then gradually lower the price to ensure sales continue

3. Penetration pricing

• The business sets a low price for a new product or 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

4. Predatory pricing

• 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

5. Competitive pricing

• The business sets its prices based on its competitors' prices

6. Promotional pricing

• This pricing strategy takes into account the customer's emotions, and compulsive behaviours in responding to price promotions

• E.g., a business may have a Bogof offer - buy one, get one free

• Generates higher volumes of sales for many products, but lowers the profit per item

7. Premium pricing

• 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

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

Recommending an appropriate pricing strategy

• A business needs to make informed decisions about its pricing and increase its chances of success

• It should carefully consider a range of factors when deciding on an appropriate pricing strategy

Factors to consider

1. Number of USPs or the amount of differentiation

• 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

2. Technology

• The use of online platforms and development of new markets has created new pricing strategies

  • E.g. Candy Crush Saga uses a freemium strategy where the initial game is free of charge after which users
    have to pay for additional features

  • Charging for these features generates a very high
    profit margin

3. Level of competition

• 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 so as to increase demand

• In less competitive markets, businesses may be able to set higher prices

4. Strength of the brand

• 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

5. 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

6. Costs and the need to make a profit

• 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

The strategy requires monitoring

• Retailers may need to adjust their pricing strategies to remain competitive in an online marketplace where customers can easily compare prices e.g www.comparethemarket.com 

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

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