Component 1: Marketing – Price — Eduqas A-Level Business
Test yourself on Component 1: Marketing – Price with EDUQAS A-Level practice questions.
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Component 1: Marketing – Price explained
Six approaches, each a different answer to the same question.
Read the full explanation
Penetration sets a deliberately low launch price to buy volume and share, and suits elastic demand where unit costs fall as output rises, though raising the price later is hard. Skimming launches high to harvest early adopters and recover development spending, as Apple and Dyson do, then steps down as rivals arrive. Cost based pricing adds a mark-up percentage to unit cost, which is simple and protects margin but ignores what buyers will pay. Competitive pricing tracks the market leader and is normal where goods are near identical, such as fuel. Psychological pricing exploits how a figure is read, the classic being an amount just below a round pound. Contribution pricing accepts any price above variable cost per unit, since contribution per unit is selling price minus variable cost per unit.
Understand how different types of business organisations in different situations will use different pricing strategies
Pricing power is not spread evenly, and the marks come from matching the approach to the firm's position. A sole trader plumber with no brand and many local rivals is close to a price taker and prices competitively, while a monopolist or a patent holder such as a pharmaceutical company can skim. Market structure, the number of competitors, brand strength, spare capacity, the stage of the product's life and the state of the economy all move the answer. A supermarket runs loss leaders and psychological prices across thousands of lines, a new entrant to a crowded market usually penetrates, and a hotel with rooms empty tonight takes any price above the variable cost of servicing the room. Objectives matter as much as costs, since survival, share growth and profit maximisation point at different prices.
Evaluate the importance for a business of selecting the most appropriate pricing strategy
How much the choice matters depends on how sensitive demand is and on what else the firm can compete with. Price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price, and for most goods the value is negative; where its size exceeds one demand is elastic, a price cut raises total revenue and the decision is critical. Where demand is inelastic, as with branded medicines or petrol, the greater risk is reputational rather than financial. Weigh the decision against the rest of the mix, because brand, distribution and service can carry a premium that no price list can, and against the danger of a price war in which every competitor loses margin. Price is the quickest lever to pull and one of the hardest to reverse.
Evaluate the impact of pricing decisions on a business and its stakeholders
Trace the decision outwards from the firm. A price cut lifts volume only where demand is elastic, margin per unit falls whatever happens, so total contribution can rise or fall, and the break even point moves because break even output is fixed costs divided by contribution per unit. Customers gain in the short run and can lose later if weaker rivals exit and choice narrows. Suppliers frequently absorb the cut, which is why supermarket price campaigns surface as squeezed payments to farmers. Employees meet pressure on hours and pay wherever a low cost position is being defended, shareholders trade thinner margins now for share won later, and competitors may retaliate. The judgement usually rests on the time horizon and on whether the lower cost base is genuinely sustainable.
Your focus
- Explain the different strategies used by businesses to determine the appropriate price for a product including penetration, skimming, cost-plus, competitive, psychological and contribution
- Understand how different types of business organisations in different situations will use different pricing strategies
- Evaluate the importance for a business of selecting the most appropriate pricing strategy
Show all 4 objectives
- Evaluate the impact of pricing decisions on a business and its stakeholders
Component 1: Marketing – Price exam tips
Marking Points
- Each strategy defined by what makes it different, not by a synonym, so penetration is low price for share and skimming is high price for early margin.
- The condition that makes the strategy sensible stated, such as elastic demand for penetration or a patent and a novelty advantage for skimming.
- Correct use of the contribution formula, that contribution per unit is selling price minus variable cost per unit, and that any positive contribution helps cover fixed costs.
- Application to the named business, naming which strategy its market position actually permits.
- The link made explicitly from a feature of the organisation, such as size, ownership or brand, to the strategy it can realistically use.
- Market conditions used as the reason, naming the number of rivals, the degree of differentiation or the elasticity of demand.
- Objectives brought in, so a firm chasing survival or cash flow prices differently from one protecting a premium brand.
- A short run point rewarded, that a business with spare capacity will price on contribution rather than full cost.
- Elasticity used properly, with the formula given in words and the conclusion that an elastic product gains revenue from a price cut while an inelastic one loses it.
- Case figures used, calculating elasticity or contribution from the data rather than asserting that demand is sensitive.
- A genuine counterargument, that price is one element of the mix and non price competition may matter more for this firm.
- A conclusion on a stated criterion, usually the firm's objective or the time horizon, rather than a restatement of both sides.
- The internal effect quantified or at least reasoned, linking price to volume, to contribution per unit and to the break even output.
- At least two stakeholder groups traced to a specific consequence, not merely named.
- Recognition of competitor reaction, so the predicted volume gain is tested against the likelihood of matching price cuts.
- A conclusion weighing short term gain against long term position, supported by evidence from the case.
Examiner Tips
- 💡Questions normally ask for two contrasting strategies rather than all six, so pick the two the case evidence supports and develop them.
- 💡Where cost and price figures are given, work out the contribution per unit and use it as evidence, because a number used well lifts an explanation into application.
- 💡Cases often present two contrasting organisations, so structure the answer around the contrast rather than writing two unconnected descriptions.
- 💡State the market condition first and the strategy second, because the reasoning is what earns the application mark.
- 💡A calculation of elasticity or of contribution often precedes the evaluation, so carry the number you worked out into the judgement instead of leaving it stranded.
- 💡Build the answer around one criterion, such as whether the objective is short term cash or long term brand value, and return to it in the final paragraph.
- 💡Rank the stakeholders by how much the decision changes their position and say why, because ranking is evaluation while listing is knowledge.
- 💡Use the case numbers for the internal impact and reserve the qualitative reasoning for the external stakeholders.
Common Mistakes
- Confusing penetration with predatory pricing or with a loss leader, when penetration is a sustainable low price to win share rather than pricing below cost to damage a rival.
- Thinking skimming means a permanently high price, when the point is the planned fall as competitors enter.
- Muddling mark-up and margin in the arithmetic, since a mark-up is calculated on cost while a margin is calculated on selling price, which gives two different answers from the same figures.
- Assuming every small firm must undercut, when a specialist independent often charges a premium for service, expertise or convenience.
- Treating a strategy as permanent, when skimming and penetration are launch tactics that change as the market develops.
- Ignoring the firm's objectives and costs and writing only about competitors.
- Claiming a lower price always raises revenue, which is only true when demand is elastic.
- Ignoring costs entirely, so an answer recommends a price cut without checking that contribution per unit still covers a share of fixed costs.
- Writing a conclusion that simply says it depends, with no criterion and no reason drawn from the case.
- Assuming the volume gain from a price cut is automatic, without considering elasticity or the capacity to supply the extra units.
- Listing stakeholders as a checklist, giving each one sentence of generic comment and no judgement about which is most affected.
- Forgetting the ethical dimension of pricing, such as pressure on suppliers or higher prices charged to customers with no alternative.