Pricing strategies
Pricing strategies are the different approaches a business can use to set the price of a product, each suited to different market conditions. Cost-plus pricing adds a fixed markup to the cost of producing one unit.
Before you start
Make sure you're comfortable with these topics first:
Method
- Learn each strategy's definition and the market condition it suits: cost-plus is simple and ensures a margin but ignores competitors and demand; competitive pricing suits markets with many similar products; penetration pricing suits new products entering a competitive market; price skimming suits innovative, unique products with little initial competition; a loss leader suits retailers with a wide product range; price discrimination suits markets where demand varies clearly by customer group, such as rail tickets.
- Learn to match a strategy to a business scenario by identifying the market conditions described, e.g. a new, unique product suggests skimming, a crowded market suggests competitive or penetration pricing.
- Practise the revenue calculation: total revenue equals price multiplied by quantity sold, and calculate the effect of a price change when quantity sold also changes.
- Practise the market share calculation: market share (as a percentage) equals a business's sales divided by total market sales, multiplied by 100.
- For 'explain' questions on why a strategy suits a scenario, state the strategy plus the linked feature of the market or product that makes it appropriate.
- For 'recommend' or 'justify' questions, compare at least two strategies against the case, then choose one with a reason tied to the business's specific circumstances, such as its objectives, competition or product.
Worked example
NovaTech is about to launch a genuinely new type of wireless charger with a patented feature no competitor currently offers. It is deciding between price skimming, launching at 89 pounds and expecting to sell 2,000 units in month one, and penetration pricing, launching at 39 pounds and expecting to sell 6,000 units in month one. Calculate the total revenue for each option in month one, and recommend which pricing strategy fits NovaTech's situation, giving a reason based on the product.
- Calculate skimming revenue: 89 x 2,000 = 178,000 pounds.
- Calculate penetration revenue: 39 x 6,000 = 234,000 pounds.
- Note that penetration pricing gives higher revenue in month one on these figures, but revenue is not the only consideration.
- Consider the product: NovaTech's charger is patented and unique, meaning it faces little direct competition at launch, which is exactly the condition price skimming is designed for, as customers who value the new feature will pay a premium before competitors can copy it.
- Recommend price skimming, because the patent protects NovaTech from competitors undercutting the high price in the short term, letting it maximise revenue from early adopters before lowering the price later.
Practice questions
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Q1What is cost-plus pricing?Show answer
Answer: Adding a fixed percentage or amount of profit markup onto the cost of producing one unit to set the selling price.
Q2Which pricing strategy involves setting a low price to enter a market and quickly build market share?Show answer
Answer: Penetration pricing.
Q3A product costs 12 pounds to make and the business wants a 25% markup. Calculate the selling price.Show answer
Answer: 12 x 1.25 = 15 pounds.
Q4What is a loss leader?Show answer
Answer: A product priced below its cost price to attract customers into a store, who are then expected to buy other, profitable products.
Q5Give one market condition that makes price skimming an appropriate strategy.Show answer
Answer: The product is new or innovative with little or no direct competition when it launches.
Q6A business sells 4,000 units at 10 pounds each. Calculate its total revenue.Show answer
Answer: 4,000 x 10 = 40,000 pounds.
Q7What is price discrimination?Show answer
Answer: Charging different customers different prices for the same product or service, based on factors such as when or how they buy it, for example off-peak versus peak train tickets.
Q8A business has sales of 150,000 pounds in a market with total sales of 1,200,000 pounds. Calculate its market share.Show answer
Answer: (150,000 / 1,200,000) x 100 = 12.5%.
Exam-style questions
Written in the style of a GCSE Business exam paper, with a full mark scheme.
Explain TWO reasons why price skimming is a suitable pricing strategy for a genuinely innovative new product.
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BrightHome sells a kettle for 25 pounds and sells 8,000 units per month. It is considering cutting the price to 20 pounds, which it forecasts will increase monthly sales to 11,000 units. (a) Calculate BrightHome's current monthly revenue from the kettle. (2 marks) (b) Calculate BrightHome's forecast monthly revenue after the price cut. (2 marks) (c) State whether the price cut is forecast to increase or decrease BrightHome's monthly revenue from the kettle. (2 marks)
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FreshMart is a small independent grocery store considering pricing fresh bread below its cost price as a loss leader, hoping customers who come in for bread will also buy higher-margin items such as deli meats and cheese. Evaluate whether FreshMart should adopt this pricing strategy.
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See real GCSE Business past-paper questions, with official mark schemes →
Free printable worksheet
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