How do organisations decide what to charge, and which pricing strategy suits a situation?
The price element of the marketing mix: the main pricing strategies (cost-plus, competitive, penetration, skimming, promotional, premium, destroyer, loss leader and psychological pricing) and the situations in which each is used.
An SQA Higher Business Management answer on the price element of the marketing mix, covering the main pricing strategies (cost-plus, competitive, penetration, skimming, promotional, premium, destroyer, loss leader and psychological pricing) and when each is appropriate.
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What this key area is asking
Price is the second element of the marketing mix and the only one that earns revenue. The SQA wants you to know the main pricing strategies, explain how each works, and judge when each is appropriate. Higher rewards you for matching a strategy to a situation (a new product, a competitive market, a luxury good) rather than just listing names.
The main pricing strategies
- Cost-plus pricing. The firm works out the cost per unit and adds a set profit margin. It is simple and guarantees a profit on each sale, but ignores what competitors charge and what customers will pay.
- Competitive pricing. The firm sets its price in line with rivals. It suits a market with many similar products where customers compare prices, but it limits the firm's ability to stand out.
- Penetration pricing. A low price is set to enter a market and win customers and market share quickly, common for a new product in a competitive market. The risk is low profit at first.
- Price skimming. A high price is set at launch to maximise profit from customers willing to pay a premium, suited to a new, innovative product with little competition (such as new technology). The price is lowered later as rivals enter.
- Promotional pricing. The price is temporarily reduced (a sale or special offer) to boost short-term sales, clear stock or attract attention.
- Premium pricing. A deliberately high price signals quality, status or exclusivity, used for luxury and designer goods where a high price is part of the appeal.
- Destroyer (predatory) pricing. A very low price, sometimes below cost, is set to drive competitors out of the market; once they leave, the firm raises prices again. It can attract regulators.
- Loss leader. A product is sold below cost to attract customers into the store, who then buy other, profitable items. Supermarkets use this on staples like bread or milk.
- Psychological pricing. A price is set just below a round figure (4.99 rather than 5.00) so it seems noticeably cheaper, influencing the customer's perception.
Factors affecting the choice of price
The strategy a firm picks depends on: the product (new, luxury or everyday); the market (how much competition there is); the firm's objective (market share, profit or survival); the firm's costs; and the price customers are willing to pay, found through market research.
Examples in context
Example 1. A supermarket's loss leaders. A supermarket sells bread and milk at or below cost as loss leaders: customers come in for the cheap staples and fill their trolleys with profitable items, so the store's total profit rises even though it loses money on the staples. This is the classic SQA example, and it contrasts with destroyer pricing, where the low price is aimed at removing a rival, not at cross-selling.
Example 2. A budget airline using penetration pricing. A new budget airline enters a route with very low fares (penetration pricing) to win passengers from established carriers quickly and build market share. Once it has loyal customers and high load factors, it raises some fares and adds charges. The low entry price sacrifices short-term profit to gain share, the standard use of penetration pricing in a competitive market.
Try this
Q1. Describe what is meant by psychological pricing. [2 marks]
- Cue. Setting a price just below a round figure, such as 9.99 instead of 10.00, so it appears noticeably cheaper and influences the customer to buy.
Q2. Explain when a business would use premium pricing rather than competitive pricing. [4 marks]
- Cue. Premium pricing is used for luxury or high-quality goods where a high price signals exclusivity and is part of the appeal (designer brands), and where the firm has a strong brand. Competitive pricing is used in a crowded market of similar products where customers compare prices, so the firm must match rivals to avoid losing sales.
Exam-style practice questions
Practice questions written in the style of SQA exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
SQA Higher style6 marksDescribe pricing strategies a business could use, and when each would be appropriate.Show worked answer →
Worth 6 marks. Describe several strategies, linking each to a situation, one mark each.
Penetration pricing (1 mark). Setting a low price to enter a market and win customers and market share quickly, used for a new product in a competitive market.
Price skimming (1 mark). Setting a high price at launch to maximise profit from customers willing to pay more, used for a new, innovative product with little competition, such as new technology.
Competitive pricing (1 mark). Setting a price in line with rivals, used in a market with many similar products where customers compare prices.
Loss leader (1 mark). Selling a product below cost to attract customers into the store, who then buy other, profitable items, used by supermarkets.
Promotional pricing (1 mark). Temporarily reducing the price (a special offer or sale) to boost short-term sales.
Psychological pricing (1 mark). Setting a price just below a round figure, such as 4.99, to make it seem cheaper.
SQA Higher style4 marksCompare penetration pricing with price skimming.Show worked answer →
Worth 4 marks. "Compare" means show how the two differ, ideally point by point.
Price level and aim (about 2 marks). Penetration pricing sets a low price to win market share quickly and attract many customers; price skimming sets a high price to maximise profit per item from customers willing to pay a premium.
Market and timing (about 2 marks). Penetration suits a new product entering a competitive market with many rivals; skimming suits a new, innovative product with little or no competition, such as new technology, where the high price is later lowered as rivals appear. Both are launch strategies, but they take opposite approaches to price.
Related dot points
- The product element of the marketing mix: the product portfolio, the product life cycle and extension strategies, the Boston Matrix, and the role of branding and packaging.
An SQA Higher Business Management answer on the product element of the marketing mix, covering the product portfolio, the product life cycle and extension strategies, the Boston Matrix, and the role of branding and packaging in building value.
- The promotion element of the marketing mix: advertising and the media used, into-the-pipeline and out-of-the-pipeline sales promotions, public relations and personal selling, and their purposes.
An SQA Higher Business Management answer on the promotion element of the marketing mix, covering advertising and the media, into-the-pipeline and out-of-the-pipeline sales promotions, public relations and personal selling, and the purpose of each method.
- The importance of customers and of being market-led, methods of market segmentation, the choice of target market, and the benefits of building customer loyalty.
An SQA Higher Business Management answer on customers and market segmentation, explaining why being market-led matters, the methods of segmenting a market, how a target market is chosen, and the benefits of customer loyalty to an organisation.
- The purpose of market research, the difference between field (primary) and desk (secondary) research, the main methods of each, and sampling, with their advantages and disadvantages.
An SQA Higher Business Management answer on market research, covering its purpose, the difference between field (primary) and desk (secondary) research, the main methods of each, and sampling, with the advantages and disadvantages of each approach.
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An SQA Higher Business Management answer on sources of finance for large organisations, covering share issues, bank loans, debentures, retained profit, government grants, leasing and trade credit, and the factors that affect the choice of source.
Sources & how we know this
- Higher Business Management Course Specification — SQA (2026)
- Higher Business Management Course Code C810 76 — SQA (2026)