How do businesses set prices, and what determines which strategy fits?
Pricing strategies including cost-plus, price skimming, penetration, competitive, psychological, predatory and dynamic pricing; the factors influencing price; and the link between price, demand and the rest of the marketing mix.
A focused answer to the Eduqas A-Level Business statement on pricing strategies. Covers cost-plus, skimming, penetration, competitive, psychological, predatory and dynamic pricing, the factors influencing price, and how price links to demand and the rest of the marketing mix, with a worked cost-plus calculation.
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What this theme is asking
Eduqas expects you to know the main pricing strategies, when each is appropriate, the factors that influence the price a firm sets, and how price links to demand and the rest of the marketing mix. Pricing is the one element of the mix that directly earns revenue, so the choice has a large effect on both sales and profit.
The main pricing strategies
Cost-plus pricing in detail
Cost-plus is the simplest method: take the cost of making one unit and add a markup.
Factors influencing the price
The price a firm sets depends on:
- Costs: price must usually cover unit cost in the long run.
- Demand and elasticity: how sensitive customers are to price (a price-inelastic product can carry a higher price).
- Competition: in a competitive market the firm has little freedom to differ from rivals.
- The product's positioning and life cycle: premium positioning needs a premium price; a launch may skim or penetrate.
- The target segment: a value segment is price-sensitive; a luxury segment is not.
- The firm's objectives: market share favours penetration; quick profit favours skimming.
Price, demand and the rest of the mix
Price and demand move together: for most products, a higher price reduces quantity demanded. How much depends on price elasticity (covered in the marketing-strategy dot point). Price must also be consistent with the other three Ps: a high-quality, well-promoted, selectively distributed product needs a price that signals its value, while a low price on a premium product confuses customers and undermines the brand. Pricing is therefore not set alone; it follows from positioning and works with product, promotion and place.
Examples in context
A new games console uses skimming, launching high for keen early adopters then cutting the price as competitors arrive. A streaming service uses penetration, a low introductory price to build a subscriber base. Supermarkets use competitive and psychological pricing () on everyday goods. Airlines and ride-hailing apps use dynamic pricing, raising fares when demand is high. A small maker uses cost-plus for simplicity but checks it against rivals.
Try this
Q1. A product costs to make and the firm wants a markup. Calculate the selling price. [2 marks]
- Cue. .
Q2. Explain one situation in which penetration pricing would be appropriate. [3 marks]
- Cue. When a firm wants to win market share quickly in a competitive or fast-imitated market, a low penetration price attracts customers and builds share before rivals respond.
Exam-style practice questions
Practice questions written in the style of WJEC Eduqas exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
Eduqas 20206 marksA product costs to make. The firm uses cost-plus pricing with a markup of . Calculate the selling price, and explain one drawback of cost-plus pricing. (6)Show worked answer →
A calculation plus a short explanation.
Selling price . (Equivalently, markup , so price .)
Drawback: cost-plus ignores what customers are willing to pay and what competitors charge, so the price may be too high (losing sales) or too low (leaving profit on the table); it is inward-looking.
Markers reward the correct price with units and one valid drawback (ignores demand and competition, may misprice, can entrench inefficiency). The common error is to add 45 rather than 45% of cost.
Eduqas 202210 marksEvaluate the most appropriate pricing strategy for a firm launching an innovative new technology product. (10)Show worked answer →
A levels-of-response evaluation. Skimming case: a genuinely innovative product faces little direct competition at launch, so a high initial (skimming) price exploits early adopters' willingness to pay, recovers high development costs quickly and signals quality, before the price falls as rivals enter. Penetration case: if the market is likely to attract fast imitators or relies on network effects, a low penetration price builds share and locks in customers before competition arrives. Evaluation: for a truly novel product with high development costs and few immediate rivals, skimming is usually most appropriate at launch, then transitioning to lower prices over the life cycle; but if speed of adoption and market share matter more than early margin, penetration fits. The judgement depends on the pace of competition, the cost structure and the firm's objectives. The top band justifies the choice and applies it.
Related dot points
- The nature and purpose of marketing; marketing objectives such as sales, market share, growth and brand; the relationship between marketing and corporate objectives; market orientation versus product orientation; and the role of marketing in adding value.
A focused answer to the Eduqas A-Level Business statement on marketing objectives. Covers the nature and purpose of marketing, marketing objectives (sales, market share, growth, brand), the link to corporate objectives, market versus product orientation, and the role of marketing in adding value.
- The marketing mix (product, price, promotion and place) and the extended mix; the product life cycle and extension strategies; the Boston Matrix; channels of distribution; promotional methods; and the need for an integrated, coordinated mix.
A focused answer to the Eduqas A-Level Business statement on the marketing mix. Covers product, price, promotion and place and the extended mix, the product life cycle and extension strategies, the Boston Matrix, distribution channels, promotional methods, and the need for an integrated mix.
- Price and income elasticity of demand and their calculation and use; the distinction between elastic and inelastic demand; the implications for pricing and revenue; marketing strategy; and digital and e-commerce marketing.
A focused answer to the Eduqas A-Level Business statement on elasticity and marketing strategy. Covers price and income elasticity of demand, calculation and interpretation, elastic versus inelastic demand and the effect on revenue, marketing strategy, and digital and e-commerce marketing, with worked elasticity calculations.
- The classification of costs into fixed, variable and total; the calculation of revenue, contribution and profit; break-even analysis and the margin of safety; the construction and interpretation of break-even charts; and the value and limitations of break-even analysis.
A focused answer to the Eduqas A-Level Business statement on costs and break-even. Covers fixed, variable and total costs, revenue, contribution and profit, the break-even point and margin of safety, break-even charts, and the value and limitations of break-even analysis, with worked calculations.
- Market segmentation and its bases (demographic, geographic, psychographic and behavioural); targeting strategies; product positioning and perceptual maps; niche and mass marketing; and the benefits and drawbacks of segmenting a market.
A focused answer to the Eduqas A-Level Business statement on segmentation, targeting and positioning. Covers the bases of segmentation, targeting strategies, product positioning and perceptual maps, niche versus mass marketing, and the benefits and drawbacks of segmenting a market.
Sources & how we know this
- Eduqas A Level Business Specification (A510) — Eduqas (2015)