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Price (AQA GCSE Business)

Revision Note

Lisa Eades

Written by: Lisa Eades

Reviewed by: Steve Vorster

The Importance of Price

  • Price is the only element of the marketing mix that relates directly to sales revenue, so is vital to a business achieving its sales and profit objectives

    • By setting suitable prices, a business can maximise revenue and improve profits

  • The pricing method must also meet the needs and expectations of customers

    • A pricing strategy should reflect the brand and quality of the product 

    • The wrong strategy is likely to reduce the potential level of profitability

      • E.g. A low price for a luxury-branded product may deter consumers who often purchase these goods as status symbols

  • A business may use more than one method of pricing across its product range

    • E.g. A large supermarket may offer premium-priced product ranges alongside a selection of loss leaders

  • Price is often closely linked to the level of demand for a product

    • In most cases, an increase in price leads to a fall in demand for a product

    • Similarly, a fall in price leads to an increase in demand for a product

    • There are some exceptions

      • Businesses that sell well-known brands with strong USPs and invest in promotional activity are less likely to be affected by falling demand when they increase prices

      • Businesses that sell essential goods or face minimal competition are likely to be able to increase prices with little impact on demand

Pricing Methods

  • A pricing method is the approach businesses use to determine what prices they should charge customers for their products

  • Choosing the right method is essential for a business to be profitable, competitive and successful in the long run

    • Price can play a significant role in the market positioning of the brand and help a firm compete with rivals

Diagram: The main pricing methods

The main pricing methods are skimming, penetration, competitive, cost-plus and loss leaders

Businesses can choose from a range of pricing strategies to suit the products they sell and the customers at which they are aimed

The Main Pricing Methods

Pricing Method and Explanation

Advantages

Disadvantages

Cost plus pricing

  • 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

  • A simple and quick method of calculating a price for a product

  • It ensures that a profit is made on each item sold

  • This pricing strategy is commonly used by manufacturers that produce standardised goods e.g. washing machines

  • It does not consider the needs of the market 

  • The pricing approach of competitors is ignored

Price skimming

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

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

  • Skimming should not be confused with premium pricing, where a permanently high price gives customers an impression of high quality and luxury

  • 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 to recover its development and marketing costs quickly

  • Less useful for new brands as it requires significant customer trust

  • Loyal customers may become tired of paying high prices for new product versions and look to see what competitors offer

Penetration pricing

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

  • This helps 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

  • Customers are attracted to buy the product at a low price, leading to high sales volume and market share

  • Competitors unable to match or beat the low price are forced out the market, leading to less competition

  • Customers may perceive that the product is of low quality if the product is sold at a low price

  • Selling at a low price limits the amount of profit made

Competition pricing

  • 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

Loss leader pricing

  • Charging a price below the average cost for a product

  • The aim of this method is to attract customers to buy other profitable, products while at the same time, making up for losses on the low-priced product

  • It is frequently used by large supermarkets that operate in competitive markets

  • This is an effective way to attract customers to switch brands

  • Losses may be minimised for businesses that have high levels of stock turnover for loss leader products

  • Smaller rivals may accuse businesses using this method of behaving unfairly

  • If customers do not purchase other goods, the business will make a loss

Factors that Influence Pricing Decisions

  • A business needs to consider various factors when determining which pricing methods it will use

  • Understanding these factors can help a business make informed decisions about its pricing and increase its chances of success

 Factors to Consider when Selecting Pricing Methods


Factor


Explanation

Number of USPs/
amount of differentiation

  • 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

Technology

  • The use of online platforms and development of new markets have created new pricing methods

    • E.g. Mobile game Two Dots uses a freemium strategy where the initial game is free of charge, after which users have to pay for additional features

    • Charging for these features generates a very high profit margin

Nature of the market

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

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

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

Strength of the brand

  • 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

Stage in the product life cycle

  • 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

Costs and the need to
make a profit

  • 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

  • Many retailers have had to adjust their pricing methods to remain competitive in an online marketplace

    • Customers are increasingly able to use online tools to compare prices, e.g www.comparethemarket.com 

  • Pricing has changed to reflect the rise of price comparison through the use of price matching policies

    • Some retailers offer to match the prices of their rivals in order to prevent customers from switching to a competitor with a lower price

Examiner Tips and Tricks

In a 12-mark question, you could be asked to recommend a suitable pricing method for a business. Consider the context of that business. What kind of product does it sell? Is it an essential or a luxury good? What kind of reputation does the business have? Is it renowned for quality or for bargains? What does the business want to achieve? Increased sales revenue or increased sales volume? All of these factors will be important when making your recommendation.

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    Author
    Reviewer
    Lisa Eades

    Author: Lisa Eades

    Expertise: Business Content Creator

    Lisa has taught A Level, GCSE, BTEC and IBDP Business for over 20 years and is a senior Examiner for Edexcel. Lisa has been a successful Head of Department in Kent and has offered private Business tuition to students across the UK. Lisa loves to create imaginative and accessible resources which engage learners and build their passion for the subject.

    Steve Vorster

    Author: Steve Vorster

    Expertise: Economics & Business Subject Lead

    Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.