How does a business decide what price to charge?
Pricing strategies and the influences on pricing strategies (technology, competition, market segments and the product life cycle).
A focused answer to Edexcel GCSE Business 2.2.2, covering the main pricing strategies and the influences on pricing decisions (technology, competition, market segments and the product life cycle).
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What this dot point is asking
Edexcel wants you to explain the main pricing strategies a business can use and the influences on which one it chooses: technology, competition, market segments and the product life cycle.
Pricing strategies
Each strategy suits different situations. Skimming works for a new, in-demand product with few rivals, because early adopters will pay a premium. Penetration works when a business wants to break into a crowded market fast and build share. Competitive pricing is common where products are similar and customers compare prices. Cost-plus guarantees a margin but ignores what customers and rivals are doing. Psychological and loss-leader pricing are tactics to influence customer behaviour. The right choice depends on the goal and the market.
Influences on pricing strategies
Technology has made pricing more transparent: customers can compare prices online in seconds, which pushes prices down and forces businesses to stay competitive. Competition is a major influence: in a market with many similar rivals, a business must price near theirs or lose customers, while a business with a unique product has more freedom. Market segments matter because different groups will pay different amounts: a premium segment accepts a higher price than a budget one. The product life cycle influences price over time: a business may skim at launch, then cut the price through growth and maturity as competition increases and the product becomes mainstream.
Try this
Q1. State one pricing strategy a business could use to win market share quickly when entering a competitive market. [1 mark]
- Cue. Penetration pricing (a low launch price).
Q2. Explain one way competition influences the price a business sets. [3 marks]
- Cue. In a competitive market it must price close to rivals or lose customers; with few rivals it has more freedom to charge more.
Exam-style practice questions
Practice questions written in the style of Pearson Edexcel exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
Edexcel 20202 marksState two factors that influence the pricing strategy a business chooses. (Paper 2, Section A)Show worked answer →
A 2-mark state question, one mark per correct influence.
Any two of: technology, competition, market segments, the product life cycle.
Markers want two distinct influences from the specification list. Choose two clearly different ones, for example "competition" and "the product life cycle".
Edexcel 20216 marksDiscuss which pricing strategy would be most suitable for a business launching a new, technologically advanced product. (Paper 2, Section B)Show worked answer →
A 6-mark discuss question rewards developed analysis of pricing strategies, applied, with a judgement.
Option one (price skimming): for a new, advanced product with little competition, the business could set a high price at launch, because early adopters will pay a premium for the latest technology, which earns high revenue to recover development costs. The price can be lowered later as rivals appear.
Option two (penetration pricing): alternatively a low launch price could win a large market share quickly and discourage competitors, but it earns less per unit and may not recover the high development costs of an advanced product.
A strong answer judges that for a genuinely new, advanced product with few rivals, skimming usually fits best (customers will pay a premium and development costs are high), whereas penetration suits a product entering a crowded market on price. Markers reward the reasoned choice, not a list of strategies.
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Sources & how we know this
- Pearson Edexcel GCSE (9-1) Business (1BS0) specification — Pearson Edexcel (2017)