Price: Applying Pricing Methods (OCR GCSE Business)

Revision Note

Author

Lisa Eades

Expertise

Business Content Creator

Choosing an Appropriate Pricing Method

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 Tip

In the exam, you may be asked to analyse the benefits or drawbacks of a particular pricing method. In your analysis, you should try to develop a chain of reasoning that makes a valid point and considers consequences. You must also remember to include references to the context to score top marks.

Case Study

Bilberry Organics logo

Bilberry Organics Limited sells and delivers British-grown seasonal vegetable boxes to mail-order customers in the London area.

Its loyal customers tend to be time-poor, high-income, 'green' consumers who value convenience and quality.

It operates in an increasingly competitive market, with three new competitors emerging in recent months and the expansion of fresh product ranges in local supermarkets.

The business has significant costs, as it runs three large farms on the outskirts of the city and is committed to paying its workers high wages. It delivers only the best quality products to customers, and operates a small fleet of electric delivery vehicles that allow products to be delivered directly to their customers' front doors.

The managing director is keen to change from its current price skimming strategy. She has identified two suitable alternative pricing strategies:

Cost-plus pricing
Competitive pricing

Recommendation

Both strategies could be appropriate for an established business like Bilberry Organics Ltd
Cost-plus pricing would ensure that Bilberry Organics Ltd's significant costs would be covered and a profit generated
Competitive pricing would mean that the business would be in a better position to maintain market share in an increasingly competitive market
Overall, it has loyal customers who have high incomes. They are likely to value Bilberry Organics Ltd's service for its convenience and high quality products, delivered in an environmentally friendly way. These customers are unlikely to be swayed by lower-priced competition. Setting prices to match rivals' may therefore not be necessary, especially as their customers may lack the time to shop in supermarkets.
Cost-plus pricing is therefore likely to be the most logical strategy

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