1.3.3 Pricing strategies

Define cost plus

The business calculates the cost of production and then adds a markup to determine the final price

Benefits and drawbacks of cost plus pricing

BENEFITS

• Simple and easy to calculate - no need for deep market analysis

• Guarantees profit margin on every product sold.

• Useful when sales are stable or predictable/

DRAWBACKS

• Ignores customer demand → may overprice.

• Doesn’t consider competitors' prices, which is risky in a competitive market.

• Can lead to loss of sales if the markup pushes the price too high.

Define price skimming

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

Benefits and drawbacks of skimming pricing

BENEFITS

• Maximises profit

• Creates that luxury brand image → seen as exclusive or high quality.

• Helps cover high development or launch costs.

DRAWBACKS

• Not good for price-competitive markets → competitors can sell it for cheaper.

• Difficult to use if brand is new or unknown – consumers may not trust the product enough to pay a premium.

• Could cause slow adoption – customers may say, “Why pay that much if no one’s even used it yet?”

• Limits initial sales volume – high prices may put off price-sensitive consumers.

Define penetration

The business sets a low price for a new product/service when it is first introduced

Benefits and drawbacks of penetration pricing

BENEFITS

• Customers love low prices → boost sales.

• Helps gain market share quickly

• Can lead to customer loyalty → if they like the product they may keep buying it when price increases

• Builds brand awareness

DRAWBACKS

• Low profit margins → not good when your first aim is trying to survive.

• Could devalue the product.

• Hard to raise prices later → competitors may be cheaper.

Define predatory

The business sets prices so low that it drives its competitors out of the market

Benefits and drawbacks of predatory pricing

BENEFITS

• Quick way to eliminate competitors → get higher market share and lead.

• Creates barriers to entry.

DRAWBACKS

• Unethical looking - damage reputation.

• Illegal → fines, lawsuits or investigations.

• New competitors still can enter, might not be able to maintain dominance.

• Unsustainable in the long term.

Define competitive pricing

The business sets its prices based on its competitors' prices

Benefits and drawbacks of competitive pricing

BENEFITS

• Helps match rivals → avoids losing customers to cheaper alternatives.

• Helps with survival → especially in a market where customer compares prices a lot, e.g electronics.

DRAWBACKS

• If competitors lower price → price wars, killing profit margin.

• Doesn’t help with differentiation -? hard to stand out as same prices.

Define psychological pricing

This pricing strategy takes into account the customer's emotions, beliefs, and attitudes towards the product/service, making the price look cheaper or more appealing.

Benefits and drawbacks of psychological pricing

BENEFITS

• Works well in mass markets → more sales → economies of scale

• Boost sales —> looks cheaper/ aka “bargain” mentality

• Works on high priced products, e.g. £999 instead of £1000.

• Makes customers act quickly → “oh no limited time deal”

DRAWBACKS

• Might not work well for luxury products, e.g. customers prefer £250 than £249.99 because it looks cheaper.

• Makes customers question the quality.

Why is pricing strategy important for a business?

It helps position the brand, compete effectively, and maximise revenue and profitability.

What should a business consider when choosing a pricing strategy?

Customers, competitors, costs, and factors like differentiation, brand strength, and market trends.

How does the number of USPs/differentiation influence pricing?

Products with many USPs can charge higher prices. E.g., Dyson charges premium due to unique features.

How does price elasticity of demand affect pricing strategy?

• If price elastic → set lower prices to boost revenue.

• If price inelastic → can set higher prices as demand won’t drop much.

How does the level of competition affect pricing?

• In highly competitive markets, firms may set lower prices to stay competitive (e.g., budget airlines).

• In less competitive markets, businesses can charge more.

How does brand strength influence pricing?

Strong brands can charge higher prices due to customer loyalty.

How does the product life cycle stage affect pricing?

• Introduction: low prices to attract customers.

• Growth: prices rise as demand increases.

• Maturity: prices may fall again to maintain sales.

Why must costs and profit be considered when pricing?

Prices must cover costs and leave a profit margin.
E.g., restaurants factor in ingredients, rent, and labour.

How have online sales changed pricing strategies?

• Retailers use dynamic pricing (change prices in real time).

• May offer lower online prices to reduce physical store costs.

How do price comparison sites affect pricing strategies?

• Retailers offer price-matching policies to avoid losing customers.

• Use pricing algorithms to track and adjust prices automatically.