Pearson Edexcel · A-Level · Economics B

    Course version: 9EB0 · Version from Sept 2015

    A) Pricing strategies: o cost plus (calculating mark up on unit cost) o…

    Full specification wording

    Competing on price: a) Pricing strategies: o cost plus (calculating mark up on unit cost) o price skimming o penetration o predatory o competitive o psychological

    Firms use various pricing strategies.

    Checked against the Pearson Edexcel 9EB0 specification (opens in a new tab) on .

    • Point 1 of 3
    • 4 key terms

    Study notes

    From the checked teaching notes for this specification point.

    The idea

    Firms use various pricing strategies. Cost-plus pricing calculates unit cost and adds a percentage mark-up to ensure a profit margin. Price skimming sets a high initial price for an innovative product to maximise short-term revenue before rivals enter. Penetration pricing sets a low initial price to rapidly gain market share and build a customer base. Predatory pricing sets prices deliberately below average variable cost to force competitors out of the market, which is illegal. Competitive pricing sets prices based on what rivals charge, typical in crowded markets. Psychological pricing sets prices to influence consumer perception, such as pricing at £9.99 instead of £10.00 to make a product appear significantly cheaper.

    What earns the marks

    • Defines cost-plus pricing as adding a percentage mark-up to the unit cost of a product.
    • Distinguishes price skimming as a high initial price for new products from penetration pricing as a low initial price to gain market share.
    • Identifies predatory pricing as an anti-competitive and illegal strategy aimed at driving rivals out of the market.
    • Explains that psychological pricing aims to manipulate consumer perception of value.

    Common mistakes and how to put them right

    • Confusing penetration pricing with predatory pricing.

      Put it right: Penetration pricing aims to gain market share for a new product, whereas predatory pricing aims to eliminate existing competitors and is illegal.

    • Assuming cost-plus pricing guarantees a profit.

      Put it right: Cost-plus pricing only guarantees a profit margin per unit if the product actually sells in sufficient quantities to cover fixed costs.

    • Believing price skimming can be maintained indefinitely.

      Put it right: Price skimming is a short-term strategy because high profits will eventually attract competitors, forcing prices down.

    Exam tips

    • When calculating a cost-plus price, ensure you accurately determine the total unit cost before applying the percentage mark-up.
    • Use the context of the business to justify a pricing strategy; for example, a technology firm launching a unique gadget is suited to price skimming.
    • Be prepared to evaluate the limitations of competitive pricing, such as the risk of a price war or ignoring the firm's own cost structure.

    Try the lesson

    The start of the Competing on price: a) Pricing strategies: o cost plus (calculating mark up on unit cost) o price skimming o penetration o predatory o competitive o psychological lesson, made from checked teaching notes for this specification point.

    Have a go first

    Which pricing strategy involves setting a very low initial price for a new product in order to quickly gain market share and attract customers from competitors?

    Listen

    Firms use various pricing strategies. Cost-plus pricing calculates unit cost and adds a percentage mark-up to ensure a profit margin. Price skimming sets a high initial price for an innovative product to maximise short-term revenue before rivals enter. Penetration pricing sets a low initial price to rapidly gain market share and build a customer base. Predatory pricing sets prices deliberately below average variable cost to force competitors out of the market, which is illegal. Competitive pricing sets prices based on what rivals charge, typical in crowded markets. Psychological pricing sets prices to influence consumer perception, such as pricing at £9.99 instead of £10.00 to make a product appear significantly cheaper. A strong answer earns marks for these points. Defines cost-plus pricing as adding a percentage mark-up to the unit cost of a product. Distinguishes price skimming as a high initial price for new products from penetration pricing as a low initial price to gain market share. Identifies predatory pricing as an anti-competitive and illegal strategy aimed at driving rivals out of the market. Explains that psychological pricing aims to manipulate consumer perception of value. A common slip: Confusing penetration pricing with predatory pricing. Instead, penetration pricing aims to gain market share for a new product, whereas predatory pricing aims to eliminate existing competitors and is illegal. Exam tip: When calculating a cost-plus price, ensure you accurately determine the total unit cost before applying the percentage mark-up.

    See it

    A top-down flowchart. The top node reads 'Pricing strategies' and branches into six nodes: 'Cost plus', 'Price skimming', 'Penetration', 'Predatory', 'Competitive' and 'Psychological'. Each of these leads to one further node describing it: 'Cost plus' leads to 'Mark-up on unit cost'; 'Price skimming' leads to 'High initial price'; 'Penetration' leads to 'Low initial price'; 'Predatory' leads to 'Below average variable cost'; 'Competitive' leads to 'Based on rivals' prices'; and 'Psychological' leads to 'Influences consumer perception'.
    It classifies the six pricing strategies and gives the defining feature of each.

    Key words

    Say what each word means before you turn the card.

    Cost-plus pricing

    Try answering aloud or in your head before turning the card.

    Price skimming

    Try answering aloud or in your head before turning the card.

    Penetration pricing

    Try answering aloud or in your head before turning the card.

    Predatory pricing

    Try answering aloud or in your head before turning the card.

    See every definition
    Cost-plus pricing
    Calculating a mark-up on unit cost by adding a percentage mark-up to the unit cost of a product to ensure a profit margin.
    Price skimming
    Setting a high initial price for an innovative product to maximise short-term revenue before rivals enter.
    Penetration pricing
    Setting a low initial price to rapidly gain market share and build a customer base.
    Predatory pricing
    Setting prices deliberately below average variable cost to force competitors out of the market, which is illegal.

    Label the diagram

    Some boxes have lost their names. Pick the right name for each number.

    The diagram again, with 3 boxes numbered instead of named. A top-down flowchart. The top node reads 'Pricing strategies' and branches into six nodes: 'Cost plus', 'Price skimming', 'Penetration', 'Predatory', 'Competitive' and 'Psychological'. Each of these leads to one further node describing it: 'Cost plus' leads to 'Mark-up on unit cost'; 'Price skimming' leads to 'High initial price'; 'Penetration' leads to 'Low initial price'; 'Predatory' leads to 'Below average variable cost'; 'Competitive' leads to 'Based on rivals' prices'; and 'Psychological' leads to 'Influences consumer perception'.

    • 1Box 1

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    • 3Box 3

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