Price, product, promotion and place (4Ps): Pricing methods, including:

The idea

This statement introduces the pricing methods within the marketing mix. Methods include cost-plus pricing, adding a percentage mark-up to unit cost; competitive pricing, setting prices in line with rivals; price skimming, charging a high initial price for a new product; penetration pricing, using a low initial price to attract customers; promotional pricing, temporarily reducing prices; and loss leader pricing, selling a product below cost to attract customers who then buy other profitable goods.

What earns the marks

• Cost-plus pricing: calculate unit cost, add a percentage mark-up, then set the selling price; ensures costs are covered and a profit margin is built in.
• Competitive pricing: set prices at or near those of rivals; helps a business remain competitive but may reduce profit margins if rivals cut prices.
• Price skimming: charge a high initial price for a new or innovative product; targets early adopters and recovers development costs quickly before competitors enter.
• Penetration pricing: set a low initial price to attract customers and gain market share quickly; may reduce short-term profit but can build a customer base.
• Promotional pricing: temporarily reduce prices to boost sales, clear stock or attract attention; can increase short-term revenue but may harm brand image if overused.
• Loss leader pricing: set the price below the cost of production to attract customers, expecting them to buy other profitable items while they are shopping.

Common mistakes and how to put them right

• Confusing cost-plus pricing with competitive pricing.

  Put it right: Identify the starting point for the price.

• Thinking penetration pricing always increases profit.

  Put it right: Explain that penetration pricing aims to build market share and may reduce short-term profit.

• Assuming loss leader pricing means the business makes an overall loss.

  Put it right: Explain that the loss on one item is offset by profits on other items bought by the attracted customers.

Exam tips

• When asked to explain a pricing method, always state how the price is determined and then give one effect on the business, such as increased sales or reduced profit margin.
• Use a named business or product to make your answer concrete, for example a new smartphone using price skimming or a supermarket using a loss leader.