Pricing Strategy (Edexcel A Level Business)

• 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

• The formula to calculate the cost-plus price is

• This pricing strategy is simple to calculate

• It is commonly used by manufacturers that produce standardised goods, e.g. washing machines

• The business sets a high price for a new product/service when it is first introduced to the market

• 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 recover its development and marketing costs quickly

• The business will then gradually lower the price to ensure sales continue

• The business sets a low price for a new product/service when it is first introduced

• This is effective when a business wants 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

• The business sets prices so low that it drives its competitors out of the market

• This strategy is illegal in many countries as it is considered anti-competitive and harms customers by reducing choice in the market

• 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

• This pricing strategy takes into account the customer's emotions, beliefs, and attitudes towards the product/service E.g. a business may set its prices at £9.99 instead of £10 as customers perceive the former as a better value

Number of USPs/
Amount of Differentiation

Price Elasticity of Demand

Level of Competition

• Products with many USPs and high differentiation can command higher prices

• E.g. Dyson vacuum cleaners have unique features which allow the company to charge a premium price

• A business needs to consider the price elasticity of demand when setting its prices

• E.g. If a business is in a highly competitive market with many substitutes, lowering prices will increase revenue

• Businesses should set lower prices If the product is price elastic

• Businesses should set higher prices If the product is price inelastic

• In highly competitive markets, businesses may need to set their prices low to remain competitive

• E.g. The budget airline industry is highly competitive and airlines keep their prices low to increase demand

• In less competitive markets, businesses may be able to set higher prices

Strength of the Brand

Stage in the Product Life Cycle

Costs and the Need to
Make a Profit

• A strong brand with a loyal customer base can command higher prices

• E.g. Nike's strong brand allows it to charge premium prices for its athletic shoes and apparel

• In the introduction stage, prices may be set lower to attract customers and build market share

• In the growth stage, prices can increase as demand for the product increases

• In the maturity stage, prices may need to be lowered again

• Prices must cover the cost of production and provide a reasonable profit margin

• E.g. A restaurant needs to consider the cost of ingredients, labour, rent, and other expenses when setting menu prices