GCSEBusinessEdexcelRevision Notes2. Building a Business2.2 Making Marketing DecisionsPrice

Price (Edexcel GCSE Business)

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Steve Vorster

Written by: Steve Vorster

Reviewed by: Jenna Quinn

Types of Pricing Strategies

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

  • Businesses usually focus on one of two options

    • High profit margin, lower volume pricing strategies (price skimming strategy) e.g. Marks & Spencer Food

    • Lower profit margin, higher volume strategy (penetration pricing strategy) e.g. Tesco

2-2-2-types-of-pricing-strategies
A business may opt for high prices with low sales volume or low prices with high sales volume 

  • In the diagram above, the top left and bottom right quadrants are the ones most frequently chosen by businesses and the choice is influenced by the brand and nature of the product

  • The top right quadrant is where freemium models are usually located

    • These firms are able to benefit from high profit margins and high sales volumes e.g Spotify 

  • It is essential that businesses choose a pricing strategy that reflects the brand and quality of the product/service

  • If they choose the wrong strategy, they can reduce the potential level of profitability

Factors Influencing the Choice of Pricing Strategy

  • By understanding their customers, competitors, and costs, businesses can set prices that maximise revenue and profitability

  • Pricing can play a significant role in positioning the brand in the market and help a firm to compete effectively

  • A business needs to consider various factors when setting its pricing strategy

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

 Factors To Consider When Choosing a Pricing Strategy

Number of USPs/
Amount of Differentiation

Technology

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

  • The use of online platforms and development of new markets has created new pricing strategies

    • E.g. Candy Crush Saga 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

  • 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 so as 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

  •  Adding to the technology point above, retailers have had to adjust their pricing strategies to remain competitive in an online marketplace where customers can easily compare prices e.g www.comparethemarket.com 

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

    • Retailers now offer to match the prices of their competitors in order to prevent customers from switching to a competitor with a lower price

Examiner Tip

Exam questions frequently ask you to be able to justify the most appropriate pricing strategy for a product or service.

When studying the data provided, consider the points above and then make a recommendation.

For example, in launching a new product with a strong brand identity, it may be appropriate to use a premium pricing strategy in order to recover research and development costs, and then gradually lowering prices over time.

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    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.

    Jenna Quinn

    Author: Jenna Quinn

    Expertise: Head of New Subjects

    Jenna studied at Cardiff University before training to become a science teacher at the University of Bath specialising in Biology (although she loves teaching all three sciences at GCSE level!). Teaching is her passion, and with 10 years experience teaching across a wide range of specifications – from GCSE and A Level Biology in the UK to IGCSE and IB Biology internationally – she knows what is required to pass those Biology exams.