Pricing Strategies (Edexcel IGCSE Business)

Cost plus

• The business calculates the cost of production and then adds a markup to determine the final price
  
  
• The markup covers the cost of production plus the business's desired profit margin
  
  
• This pricing strategy is commonly used by manufacturers that produce standardised goods e.g. washing machines

• A simple and quick methods of calculating a price for a product
  
  
• It ensures that a profit is made on each item sold

• It does not consider the needs of the market 
  
  
• The pricing approach of competitors is ignored

Skimming

• The business sets a high price for a new product when it is first introduced to the market
  
  
• The business will then gradually lower the price to ensure sales continue
  
  
• Skimming should not be confused with premium pricing, where a permanently high price gives customers an impression of high quality and luxury

• This is effective when an established brand is introducing a new product and there is a high demand for it e.g successive models of Apple's Macbook Air
  
  
• The high price helps the business to recover its development and marketing costs quickly

• Less useful for new brands as it requires significant customer trust
  
  
• Loyal customers may become tired of paying high prices for new product versions and look to see what competitors offer

Penetration

• The business sets a low price for a new product/service when it is first introduced
  
  
• This helps to quickly capture market share and attract price-sensitive customers e.g. many new perfumes launch using penetration pricing
  
  
• Once they have enough customers, the business will start to raise the price

• Customers are attracted to buy the product at a low price leading to high sales volume and market share
  
  
• Competitors unable to match or beat the low price are forced out the market leading to less competition

• Customers may perceive that the product is of low quality if the product is sold at a low price
  
  
• Selling at a low price limits the amount of profit made

Competition

• The business sets its prices based on its competitors' prices

• This is effective when a business is in a highly competitive market and wants to maintain its market share

• The business must continually monitor its competitors' prices and adjust its prices accordingly to remain competitive

Promotional pricing

• This pricing strategy takes into account the customer's emotions, and compulsive behaviours in responding to price promotions
  
  
• E.g. a business may have a Bogof offer - buy one get one free

• Generates high volumes of sales for a limited period
  
  
• Can be a useful tool to catch the attention of customers

• Profit margins are likely to be lower during price promotions
  
  
• Customers may be unwilling to pay a higher price once a price promotion comes to an end