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133 Pricing Strategies
AS Edexcel New Specification 2015
Business
By Mrs Hilton for
Lesson Objectives
• To be able to identify and discuss a range of
pricing strategies
• To be able to discuss factors that determine
the most appropriate pricing strategy
• To be able to explain why pricing needs to be
changed to reflect social trends
• To be able to answer sample exam questions
based on the topic area
Guidance from
Edexcel
From the specification
a) Types of pricing strategy:
cost plus (calculating mark-up on unit cost)
price skimming
penetration
predatory
competitive
psychological
b) Factors that determine the most appropriate pricing
strategy for a particular situation:
number of USPs/amount of differentiation
price elasticity of demand
level of competition in the business environment
strength of brand
stage in the product life cycle
costs and the need to make a profit
c) Changes in pricing to reflect social trends:
online sales
price comparison sites
Starter
• What are these?
• What are their USP?
• How should they be
priced?
• Link to webpage
• Link to video
Pricing strategies
• Here are the main ways that any business
might decide on what price to make their
products or services…
Cost-plus
Competitive
Skimming <creaming>
Penetration
Predatory
Psychological
Cost – plus pricing
• The cost to produce the
products are worked out
then money is added on
top. There are two ways
of doing this
– Add a profit margin in £
– Add a % percentage
mark-up on top of the
cost of making the
product
Competitive pricing
• Some products or
services are priced in line
with competitors.
• This means that
customers will have to
judge a product or service
on “non-price” methods
such as; quality of service
or speed.
• Have a look at Jack
Rabbits café
Skimming or creaming pricing
• A product is priced high
to begin with as it has a
desirability factor
(novelty) that will mean
customers will want it
when it is new.
• E.g. iphone 6+, ipad,
iWatch
• Usually applies to
technology items with a
short product lifecycle
(soon to be replaced with
a new model)
Penetration pricing
• This means setting prices
really low on a new product to
encourage sales and to
persuade customers to try the
product. Then when they like
the product and have to keep
buying it the business raises
the price.
• Low prices should gain the
business more market share.
• Mass market – repeat
purchases e.g. tea bags,
biscuits which are called fast
moving consumer goods
(FMCG).
3 min video on penetration prices
Predatory Pricing
• In oligopolies or monopolies existing businesses may hold off the
threat of a new entrant by lowering their prices so that any
competitor cannot make a profit.
• When aggressive price cutting is used to deter competitors or push
them out of the market this is known as destroyer pricing
• The intention is to drive competitors out of the market place of set
barrier to entry to discourage new ones
• Depends on the price elasticity of the product, if it is low then a
lower price won’t make much difference
• Depends on the strength of the brand, will consumers switch or
stay loyal?
• Depends on the financial strength of the firm can they afford to cut
prices?
• Example: Amazon
• Example Wal-Mart
Psychological pricing
• This means pricing a product at £1.99
rather than £2.00 to appear cheaper.
• Some businesses consider pricing
carefully as it is often an indicator of
quality.
• If customers were to buy a cheap baby
car seat they may consider this to be a
risk, but if it is expensive or
competitively priced against other
similar products the customer may be
assured of its quality and reliability.
• High value or status items like luxury
cars avoid pricing just below but
instead may price higher to match their
customers’ expectations.
Bbc video of cheap car seat test
Factors that determine the most
appropriate pricing
strategy for a particular situation
• number of USPs/amount of differentiation
– Non-price competition e.g. level of service
• price elasticity of demand
– Whenever you have a question on pricing think
elasticity as the two go hand in hand. Reducing the
price can lead to higher revenue if the market is very
price sensitive
• level of competition in the business environment
– No business works in isolation so a change in the price
of one business may result in the change of all the
others
Factors that determine the most
appropriate pricing
strategy for a particular situation
• strength of brand; strong the brand the higher
price can be charged. How much is Heinz
ketchup vs ASDA own label? Link
• stage in the product life cycle
– Products in the saturation or decline phase may
be priced lower to clear stocks before a new
product is introduced. Interactive product life
cycle link
• costs and the need to make a profit
Changes in prices to reflect social
trends
• Online sales
– Food ordering online is trending, which may see the
death of the weekly shop at massive out of town
hypermarkets, shoppers can easily compare prices of
dozens of similar products
– Products will need to have stronger branding or lower
prices to persuade consumers to switch
• Price comparison sites
– Customers are now able to shop around and using these
sites compare prices of insurance, where previously they
would have had to phone a few companies to get quotes.
This was time consuming and an expensive phone bill.
They work by heavily advertising and the companies pay
to be featured in a list.
– Uswitch
– Go compare
– Money supermarket
– Article on BBC on problems with price comparison sites
Plenary game
• Pricing Yachts interactive game:
• http://www.aisr.org/ibinfo/IBBaccpack/Marke
ting_student/page_183.htm
Sample question 1
• 20 marks – case material on next slide
Knowledge
4
Application
4
Evaluation
6
Analysis 6
Answer question 1
Answer question 1
Answer question 1
How to level
the 20 mark
sample
question
No evaluation –
mark stays at
Level 1
Sample question 2
8 mark question
Taken from legacy unit 1 June 2010
Case study on next slide
Answer question 2
Revision Video
Glossary
• Cost-plus; To set the price of a product or
service by calculating the cost then adding a
set amount or % to it.
• Competitive pricing; To charge a similar
amount for goods as are charged elsewhere
• Mark-up; The amount above cost added to a
product before it is placed for sale