Pricing Strategies (Edexcel IGCSE 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

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

A simple and quick methods of calculating a price for a product

It ensures that a profit is made on each item sold

It does not consider the needs of the market 

The pricing approach of competitors is ignored

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

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

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, and compulsive behaviours in responding to price promotions

E.g. a business may have a Bogof offer - buy one get one free

Generates high volumes of sales for a limited period

Can be a useful tool to catch the attention of customers

Profit margins are likely to be lower during price promotions

Customers may be unwilling to pay a higher price once a price promotion comes to an end