Pricing strategies

Six pricing strategies

• Cost plus: add a percentage mark-up to the unit cost. Price = unit cost x (1 + mark-up / 100). Simple and ensures costs are covered, but ignores demand and competitors.
• Price skimming: launch at a high price to early adopters who are keen to have the product first, then lower it over time. Suits innovative products with USPs and strong brands; recovers development costs quickly. Attracts competitors.
• Penetration pricing: launch at a low price to gain market share quickly, then raise it once customers are loyal. Suits mass markets with price elastic demand. Low early profit; customers may leave when price rises.
• Predatory pricing: setting prices very low (often below cost) to drive competitors out of the market, then raising them. Needs deep financial reserves and is illegal in many countries as anti-competitive.
• Competitive pricing: setting a price at or close to rivals' prices. Common where products are similar and competition is strong.
• Psychological pricing: prices that seem lower than they are ($9.99 rather than $10) or high prices that signal quality.

Choosing a strategy

Factors in the specification:

• Number of USPs / amount of differentiation: more differentiation allows higher prices (skimming).
• Price elasticity of demand: inelastic demand allows higher prices; elastic demand favours competitive or penetration pricing.
• Level of competition: many rivals push towards competitive pricing.
• Strength of brand: strong brands can charge a premium.
• Stage in the product life cycle: skimming or penetration at launch, competitive pricing in maturity, discounts in decline.
• Costs and the need to make a profit: price must cover costs in the long run.

Social trends: online sales and price comparison sites

• Online sales: lower costs (no shop rents) allow lower prices; dynamic pricing changes prices in real time with demand; customers can compare prices easily.
• Price comparison sites: make price information transparent, so demand becomes more price elastic. Firms are pushed to cut prices or compete on other elements of the mix (service, delivery, quality). The January 2022 WBS11 paper asked candidates to assess the impact of price comparison websites on UK supermarkets; the scheme noted pressure on prices but that loyalty and other factors limit the impact.

Worked example

A bakery's unit cost for a loaf is $1.60 and it uses a 75% mark-up. Calculate the price. Then explain one problem with cost-plus pricing.

1. Price = 1.60 x (1 + 75/100) = 1.60 x 1.75 = $2.80.
2. Problem: it ignores what customers will pay and rivals' prices; if a supermarket sells a similar loaf for $1.50, few will buy at $2.80.

Answer: $2.80; cost plus ignores demand and competition.

Check yourself

1. A product has a unit cost of $24. The firm uses a 40% mark-up. Calculate the selling price.
   Show answer

   $33.60. 24 x 1.40 = $33.60.

2. A firm's total costs are $90,000 to make 6,000 units. It adds a 30% mark-up. Calculate the price per unit.
   Show answer

   $19.50. Unit cost = 90,000 / 6,000 = $15; price = 15 x 1.3 = $19.50.

3. A shop buys a jacket for $50 and sells it for $80. What percentage mark-up on cost is this?
   Show answer

   60 %. (80 - 50) / 50 x 100 = 60%.

4. A technology firm launches an innovative new tablet at a high price, cutting it after a year. This is
   • penetration pricing
   • predatory pricing
   • price skimming
   • cost-plus pricing
   Show answer

   price skimming. High launch price to early adopters, lowered later.

5. Penetration pricing is most suitable when
   • demand is price elastic and the firm wants market share quickly in a mass market
   • the product has a strong USP and no rivals
   • the firm wants to recover development costs quickly
   • the product is in decline
   Show answer

   demand is price elastic and the firm wants market share quickly in a mass market. Low prices win share where customers are price sensitive.

6. Explain one effect of price comparison websites on retailers.
   Show answer

   They make it easy for customers to compare prices, so demand becomes more price elastic and retailers are pressured to cut prices or compete on service.. Price transparency increases price sensitivity and competition.

7. Why is predatory pricing risky for a firm?
   • It may be illegal and losses are made while prices are below cost
   • It always increases short-term profit
   • It requires no financial reserves
   • It is the same as psychological pricing
   Show answer

   It may be illegal and losses are made while prices are below cost. Below-cost pricing loses money and may breach competition law.

8. Pricing a product at $4.99 instead of $5.00 is
   • competitive pricing
   • psychological pricing
   • price skimming
   • cost-plus pricing
   Show answer

   psychological pricing. It feels cheaper than $5.

Practise with instant feedback Print this lesson

Sources

• Pearson Edexcel International Advanced Subsidiary/Advanced Level in Business specification (2018)
• Pearson WBS11/01 mark scheme, January 2022

Last updated 8 November 2026. Spotted a mistake? Tell us.