Pricing strategies — Edexcel A-Level Business
Test yourself on Pricing strategies with PEARSON EDEXCEL A-Level practice questions.
7 days Premium · Then free forever · No card, no charge
Pricing strategies explained
Each strategy answers a different question about where the price comes from.
Read the full explanation
Adding a percentage mark up to unit cost starts inside the business, so a unit cost of twenty pounds with a mark up of forty per cent gives a price of twenty eight pounds; it guarantees a margin but ignores what customers will pay. Skimming launches high to recover development costs from early adopters before the price falls, which suits new technology under patent. Penetration launches low to buy share and repeat purchase, betting on volume and a later rise. Pricing below cost to force a rival out is unlawful for a dominant firm under competition law. Following the going rate fits a crowded market with weak differentiation, and charm endings such as ninety nine pence shift perception rather than value.
b) Factors that determine the most appropriate pricing strategy for a particular situation: number of USPs/amount of differentiation; price elasticity of demand; level of competition in the business environment; strength of brand; stage in the product life cycle; costs and the need to make a profit
Price is a decision about what the market will bear, bounded by what the business must cover. Real differentiation buys room above the going rate; without it the firm is a price taker and price becomes the only variable left. Price elasticity of demand, the percentage change in quantity demanded divided by the percentage change in price, decides whether a price rise raises or cuts total revenue, so it is the pivot of most answers. Competitive conditions read through the Porter five forces set rivalry and buyer power, although that model is blind to how quickly a market can change. A strong brand supports a premium, while the life cycle moves the choice from launch pricing towards the going rate at maturity. Finally the price must exceed variable cost per unit, or contribution is negative and no volume can rescue it.
c) Changes in pricing to reflect social trends: online sales; price comparison sites
Selling on the internet and comparing sellers in seconds has removed the search cost that used to protect prices. When every rival is one click away, demand for an undifferentiated product becomes far more price elastic and buyer power rises, exactly the force Porter describes strengthening as switching costs and information barriers fall. The practical results are dynamic pricing, where an algorithm reprices against competitors many times a day, thinner margins for retailers whose only claim is convenience, and showrooming, where a shopper inspects a product in store then buys it elsewhere. Comparison platforms also take a commission on each referred sale. The escape is differentiation, bundled service or a brand that a comparison table cannot display, which is why strong brands are less exposed than commodity sellers.
Your focus
- a) Types of pricing strategy: cost plus (calculating mark-up on unit cost); price skimming; penetration; predatory; competitive; psychological
- b) Factors that determine the most appropriate pricing strategy for a particular situation: number of USPs/amount of differentiation; price elasticity of demand; level of competition in the business environment; strength of brand; stage in the product life cycle; costs and the need to make a profit
- c) Changes in pricing to reflect social trends: online sales; price comparison sites
Pricing strategies exam tips
Marking Points
- Calculating price as unit cost plus the mark up percentage of that unit cost, giving the answer in pounds and pence.
- Separating mark up, which is profit as a percentage of cost, from margin, which is profit as a percentage of selling price.
- Choosing skimming or penetration for a reason drawn from the case, such as patent protection and early adopters against a crowded market and a share target.
- Identifying pricing below cost aimed at removing a competitor as the predatory case, and noting the legal risk for a dominant firm.
- Ranking the factors for the business in the case rather than listing them, and saying which one dominates the decision.
- Using price elasticity of demand to predict the direction of total revenue after a price change.
- Linking the stage in the product life cycle to the strategy, such as penetration at launch and going rate pricing at maturity.
- Testing the price against contribution per unit, which is selling price less variable cost per unit, so that the price at least covers variable cost.
- Explaining that price transparency makes demand more price elastic, so a small price gap now moves a large volume of sales.
- Connecting comparison platforms to buyer power and to the commission the seller pays on each referred sale.
- Naming a response that restores pricing power, such as differentiation, a loyalty scheme, bundling or an exclusive range.
- Judging the effect for the specific business, since a strongly branded product is far less exposed than a commodity.
Examiner Tips
- 💡A calculation item may give unit cost and a required mark up, so show the working line and label the units.
- 💡For a strategy choice, write one developed chain for the strategy you back and one that dismisses the rejected option with a case reason.
- 💡Examiners reward a strategy tied to the stage of the product life cycle, so say where the product currently sits.
- 💡This is the long evaluate question in the marketing section, so plan two arguments, one counter argument and a conditional judgement.
- 💡Anchor the judgement on the single most important factor and say why the others matter less for this business.
- 💡Where the case gives an elasticity value or competitor prices, quote it, because judgements supported by case evidence reach the top level.
- 💡The case will usually carry a market share or average price figure, so use it to show the size of the pressure.
- 💡Answers score by linking the trend to elasticity and then to total revenue, not by describing how the internet works.
- 💡Finish with a condition, for example that price transparency hurts most where differentiation is weakest.
Common Mistakes
- Applying the mark up percentage to the selling price instead of to unit cost, which understates the price.
- Confusing skimming with permanent premium pricing, when skimming is a planned fall in price across the product life cycle.
- Calling any low price predatory, when the term means below cost and intended to drive a rival out of the market.
- Writing a sentence on each factor in turn, which reads as knowledge and earns little application or evaluation credit.
- Ignoring competitor reaction, so a price cut is assumed to win share when rivals simply match it and every firm loses margin.
- Treating costs as the main determinant of price, when the customer willingness to pay sets the ceiling and cost only sets the floor.
- Assuming online selling always cuts costs, ignoring delivery, returns processing and the commission taken by the platform.
- Concluding that the business must simply cut its price, which invites a price war that destroys margin for everybody.
- Treating all products as equally comparable, when service, availability and brand never appear in a comparison table.