Pearson Edexcel · A-Level · Economics B
Course version: 9EB0 · Version from Sept 2015
B) Factors that determine the most appropriate pricing strategy for a…
Full specification wording
Competing on price: b) Factors that determine the most appropriate pricing strategy for a particular situation: o number of USPs/amount of differentiation o price elasticity of demand o amount of competition o strength of brand o stage in the product life cycle o costs and the need to make a profit
Choosing the right pricing strategy depends on multiple interacting factors.
Checked against the Pearson Edexcel 9EB0 specification (opens in a new tab) on .
- Point 2 of 3
- 4 key terms
Study notes
From the checked teaching notes for this specification point.
The idea
Choosing the right pricing strategy depends on multiple interacting factors. A product with many Unique Selling Points (USPs) or strong differentiation can sustain premium pricing, as can a powerful brand with high customer loyalty. If demand is price inelastic, a business might raise prices to maximise revenue, whereas elastic demand often necessitates competitive pricing. The amount of competition dictates whether a firm is a price maker or taker. The product life cycle stage is crucial; for example, penetration pricing might be used at launch, while prices may drop during decline. Finally, all strategies must consider costs to ensure a profit margin is achieved, often setting a price floor below which the product becomes unviable.
What earns the marks
- Identify how a strong brand or multiple USPs allow a business to adopt premium or price skimming strategies.
- Explain the relationship between price elasticity of demand and pricing decisions, such as lowering prices when demand is elastic to increase total revenue.
- Assess how the level of competition influences pricing power, forcing firms in highly competitive markets to use competitive pricing.
- Evaluate how pricing strategies change across the product life cycle, such as using penetration pricing during introduction and discounting during decline.
- Calculate or explain how costs determine the minimum price required to achieve a target profit margin.
Common mistakes and how to put them right
Assuming price skimming can be used for any new product.
Put it right: Skimming is only effective if the product has strong USPs, high differentiation, or a strong brand to justify the high initial price.
Confusing the pricing strategies used at different life cycle stages.
Put it right: Penetration pricing is typically for the introduction stage to gain market share, not the maturity stage.
Ignoring costs when discussing competitive pricing.
Put it right: Even when matching competitors' prices, a business must ensure the price covers its costs to remain profitable.
Exam tips
- Always link the chosen pricing strategy back to the specific context of the business, such as its brand strength or market competition.
- Use price elasticity of demand explicitly when explaining why a price increase or decrease would be appropriate for a given product.
- When evaluating a pricing decision, consider the trade-off between gaining market share through penetration pricing and maximising short-term profit margins.
Try the lesson
The start of the Competing on price: b) Factors that determine the most appropriate pricing strategy for a particular situation: o number of USPs/amount of differentiation o price elasticity of demand o amount of competition o strength of brand o stage in the product life cycle o costs and the need to make a profit lesson, made from checked teaching notes for this specification point.
Have a go first
Which of the following product characteristics is most likely to allow a business to successfully use a price skimming strategy?
Listen
Choosing the right pricing strategy depends on multiple interacting factors. A product with many Unique Selling Points (USPs) or strong differentiation can sustain premium pricing, as can a powerful brand with high customer loyalty. If demand is price inelastic, a business might raise prices to maximise revenue, whereas elastic demand often necessitates competitive pricing. The amount of competition dictates whether a firm is a price maker or taker. The product life cycle stage is crucial; for example, penetration pricing might be used at launch, while prices may drop during decline. Finally, all strategies must consider costs to ensure a profit margin is achieved, often setting a price floor below which the product becomes unviable. A strong answer earns marks for these points. Identify how a strong brand or multiple USPs allow a business to adopt premium or price skimming strategies. Explain the relationship between price elasticity of demand and pricing decisions, such as lowering prices when demand is elastic to increase total revenue. Assess how the level of competition influences pricing power, forcing firms in highly competitive markets to use competitive pricing. Evaluate how pricing strategies change across the product life cycle, such as using penetration pricing during introduction and discounting during decline. A common slip: Assuming price skimming can be used for any new product. Instead, skimming is only effective if the product has strong USPs, high differentiation, or a strong brand to justify the high initial price. Exam tip: Always link the chosen pricing strategy back to the specific context of the business, such as its brand strength or market competition.
See it
Key words
Say what each word means before you turn the card.
Pricing strategies
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Market competition
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Product life cycle
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Price elasticity of demand
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See every definition
- Pricing strategies
- The approaches a business chooses for setting prices, determined by factors such as USPs, price elasticity of demand, competition, brand strength, life cycle stage and costs.
- Market competition
- The amount of competition, which dictates whether a firm is a price maker or taker and can force firms in highly competitive markets to use competitive pricing.
- Product life cycle
- The stage a product has reached, which is crucial because pricing strategies change across it, such as penetration pricing at launch and prices dropping during decline.
- Price elasticity of demand
- Whether demand is price inelastic, when a business might raise prices to maximise revenue, or elastic, when competitive pricing is often necessitated.
Label the diagram
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1Box 1
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3Box 3
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