Pricing Methods

Setting the right price

Price is one of the four parts of the marketing mix, alongside product, promotion and place. Getting it right matters, because in general a higher price lowers demand while a lower price raises it. A business can choose from several pricing methods. Cost-plus adds a mark-up to the cost of making an item. Competitive pricing sets a price near what rivals charge. A loss leader sells cheaply to draw customers in. Price skimming charges a high price at launch for something new, then lowers it later. Price penetration launches low to win market share fast. The best choice depends on the costs, the market, the competition and the stage of the product life cycle. This module covers those methods and factors.

Pricing words

Learn these before you match any method, and remember price and demand usually pull in opposite directions.

Skimming against penetration

Two launch strategies aim in opposite directions, so it helps to set them side by side.

How to choose a pricing method

Never just name a method. Fit one to the firm in front of you. Ask what it costs to make, how many rivals there are, and whether the product is brand new or well known. Something unique with few rivals can carry a high launch price. A crowded market may need a low price to break in, or a price close to the competition. A shop chasing footfall might sell one item at a loss. Name your choice and say why it beats the others for this business.

Match the method to what it means

Which method is this?

A supermarket sells milk very cheaply, below its usual margin, hoping shoppers come in and fill a whole trolley. Which pricing method is this?

• A loss leader.
• Price skimming.
• Cost-plus pricing.
• Price penetration for the whole shop.

Factors affecting price

Select the TWO factors that genuinely influence a pricing decision.

• How much it costs the firm to make the item
• How much competition there is in the market
• The colour of the company logo
• The name of the manager

Cost-plus price

A product costs 8 pounds to make. Using cost-plus pricing, the firm adds a mark-up of 5 pounds. Add these to find the selling price, in pounds.

Order price skimming

Put the stages of price skimming in order, earliest first.

• A new gadget launches at a high price
• Keen early buyers pay the high price
• Rivals bring out similar products
• The firm lowers the price to keep selling

Complete the facts

Adding a mark-up to the cost of making an item is _____ pricing. Charging a high price at launch for a new product is price _____. Launching at a low price to win market share is price _____. Selling an item cheaply to draw customers in is a _____ leader.

Match the business to the best method

Spot the true pricing facts

Tap the TWO statements that are true about pricing.

• A higher price usually lowers demand
• Cost-plus pricing adds a mark-up to the cost
• Price skimming means launching at a low price
• The cost of making an item never affects its price

Pick the price

Read each case and choose the best pricing method, with a reason.

• A tech firm has a genuinely new smartwatch with no direct rivals yet. Which method captures the most value at launch?
• A new cola brand must break into a market packed with big names. Which method wins share fastest?
• A student names a pricing method but never says why it suits the business. How could the answer be improved?

Recommend a pricing method

A small firm is about to launch a new premium coffee in a market with several strong rivals. Recommend how it should price the coffee.

• Explain what a pricing method is
• Describe two methods the firm could use, such as skimming and penetration
• Recommend the single method that suits this launch best
• Justify your choice using the firm costs, market and competition
• Finish with a judgement on how the price links to the demand it expects