Pricing Strategies (SQA National 5 Business Management): Revision Note

Cost-plus pricing

• This involves calculating the total cost of producing a product and then adding a percentage mark-up for profit

  • E.g. if a product costs £10 to make and a 25% profit is added, the selling price is £12.50

• Cost-plus pricing is most appropriate when a business has clear production costs, often manufacturers or retailers. and wants a guaranteed profit margin

Evaluating the use of cost-plus pricing

Premium pricing

• This involves setting prices higher than competitors to reflect superior quality, exclusivity or brand image

• It is most appropriate for luxury, high-quality, or niche products where customers are willing to pay more for perceived value

  • E.g. Harris Tweed fabrics are sold at a higher price than standard textiles because they are handmade and high quality

  • Customers pay more for the craftsmanship and authenticity of the product

Evaluating the use of premium pricing

Budget pricing

• This strategy involves setting prices low to attract cost-conscious customers and increase sales volume

• It is often used by discount retailers where customers are highly price-sensitive or when trying to attract new customers to the brand

  • E.g. Aldi keeps prices as low as possible to attract cost-conscious shoppers

  • It sells high volumes of products with small profit margins, offering affordable alternatives to branded goods

Evaluating the use of budget pricing

Promotional pricing

• This strategy involves temporarily lowering prices or offering special deals to encourage sales

  • E.g. “Buy one, get one free” or short-term discounts

• It is often used to boost short-term sales, clear old stock, or attract new customers to a brand

  • E.g. Boots frequently runs short-term promotions such as “3 for 2” on cosmetics and skincare

  • These temporary price reductions attract new customers, increase basket size and help clear seasonal stock

Evaluating the use of promotional pricing

Psychological pricing

• This strategy involves setting prices that appear lower than they really are to make customers believe they are getting better value

• It is often used in shops where customers make quick buying decisions and are influenced by small price differences

  • E.g. Greggs uses psychological pricing in its bakery stores, selling items such as sausage rolls for £1.99 rather than £2.00

  • The slightly lower figure makes the price appear better value to customers making quick, everyday purchases.

Evaluating the use of psychological pricing

Penetration pricing

• This strategy involves introducing a new product at a low initial price to attract customers quickly, gain market share and build loyalty before gradually raising the price

• It is often used for new products entering competitive markets where customer awareness is low

  • E.g. STV Player+ launched its ad-free subscription service at a low introductory price to attract early users before raising the monthly fee

Evaluating the use of penetration pricing

Price skimming

• This strategy involves launching a new or innovative product at a high price to maximise profit from early adopters, then gradually lowering it as competition increases

• It is often used for new technology or high-end products with strong customer interest and few competitors at launch

  • E.g. Sky used price skimming when introducing Sky Glass

  • It charged a high launch price for early adopters before reducing prices as competition and awareness increased

Evaluating the use of price skimming