How do businesses set prices, and what shapes the right strategy?
Pricing strategies including cost-plus, penetration, price skimming, competitive, psychological and loss-leader pricing, the factors that determine the choice of strategy, and price elasticity of demand and its influence on pricing decisions.
A focused answer to the OCR A-Level Business marketing theme on pricing, covering cost-plus, penetration, skimming, competitive, psychological and loss-leader pricing, the factors shaping the choice, and price elasticity of demand with a worked calculation.
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What this theme is asking
OCR wants you to explain the main pricing strategies, the factors that decide which to use, and the role of price elasticity of demand in pricing. Elasticity is a calculation skill that appears regularly in Components 1 and 2.
The main pricing strategies
Each suits a situation. Cost-plus guarantees a margin but ignores demand and competition. Penetration builds share fast but sacrifices early profit. Skimming maximises early revenue from a distinctive product but invites rivals. Competitive pricing is common in crowded markets. Loss-leaders work for retailers who profit on the rest of the basket.
Factors that determine the choice
No strategy is right in isolation. A firm weighs these factors against its marketing objectives: a share-growth objective favours penetration; a profit objective on a distinctive product favours skimming.
Price elasticity of demand
PED drives the revenue effect of a price change. For an inelastic product (few substitutes, strong brand, a necessity), a price rise raises total revenue because sales fall by proportionally less. For an elastic product (many substitutes, a luxury, easily compared), a price rise lowers total revenue. Knowing PED tells a firm whether to raise or cut price to grow revenue.
Examples in context
Streaming services often used penetration pricing, launching cheap to build a subscriber base before raising prices once customers were locked in. Apple uses skimming, charging high prices for new models, then cutting them as the next model launches. Petrol and branded medicines are relatively inelastic (necessities with few substitutes), so price rises raise revenue, while a specific brand of chocolate bar is elastic because shoppers switch easily.
Try this
Q1. A price falls by and quantity demanded rises by . Calculate the PED and state whether demand is elastic or inelastic. [3 marks]
- Cue. ; ignoring the sign, , so demand is elastic.
Q2. Analyse why a firm launching an innovative product might use price skimming. [6 marks]
- Cue. With few rivals and inelastic early demand from keen buyers, a high initial price maximises early revenue before competitors enter, developed as a chain in context.
Exam-style practice questions
Practice questions written in the style of OCR exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
OCR H431/01 20226 marksA product's price rises by and quantity demanded falls by . Calculate the price elasticity of demand and explain what it tells the firm. (6)Show worked answer →
A Component 1 calculation rewarding the formula, working and interpretation. Price elasticity of demand . Because the value (ignoring the sign) is less than , demand is price inelastic: quantity changes by proportionally less than price. This tells the firm it can raise price and total revenue will rise, because the percentage fall in sales is smaller than the percentage rise in price. Markers reward the calculation, the units-free ratio, recognition that the negative sign reflects the inverse relationship, and the revenue implication. The common error is to invert the formula.
OCR H431/02 202312 marksAssess the factors a UK manufacturer should consider when choosing a pricing strategy for a new product. (12)Show worked answer →
A 12-mark "Assess" on a four-level grid. Build chains around the main factors: the price elasticity of demand (inelastic products can carry skimming or higher prices); the level of competition (in a crowded market competitive pricing may be forced); costs (price must at least cover costs in the long run, the basis of cost-plus); the product life cycle stage (penetration to launch, skimming for an innovative product); and the brand and positioning (a premium brand cannot price low without damaging image). Evaluation: weigh which factor dominates for the specific product, for example elasticity and competition usually matter most, but the strategy must also fit the firm's objectives and positioning. A judged conclusion reaches the top band.
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Sources & how we know this
- OCR A-Level Business (H431) specification — OCR (2015)