Pricing strategies
A pricing strategy is the approach a business takes to setting its price. The price has to be high enough to cover costs and make a profit, and low enough that customers will buy — but within that range there are real choices, and each one sends a different signal to the customer.
Common mistake
Skimming and penetration are opposites and are easily swapped. Skimming starts high and comes down; penetration starts low and goes up. Remember that skimming takes the cream off the top first.
- Pricing strategy
- the approach a business takes to setting its price, which must cover costs and make a profit while remaining low enough that customers will buy
- Price skimming
- setting a high price at launch, aimed at customers who will pay to have the product first, then lowering it later
- Price penetration
- setting a low price at launch to win customers quickly, then raising it once the product is established
- Competitive pricing
- setting the price in line with rivals' prices
- Cost-plus pricing
- setting the price by adding a fixed percentage mark-up to the cost of producing each unit
Influences on pricing strategies
The specification names four influences, and expects you to explain how each affects the choice.
Technology. Customers can compare prices online in seconds, which pushes prices down and makes it hard to charge more than a rival for the same item. But technology also lets a business change prices instantly, vary them by time of day or by customer, and sell without the costs of a shop — so it can afford to charge less.
Competition. The more competitors there are, and the more similar their products, the less freedom a business has. In a crowded market of near-identical products, competitive pricing is often the only realistic strategy. A business with a genuinely differentiated product has far more room, which is why 2.2.1's differentiation matters here.
Market segments. Different segments will pay different amounts. A segment targeted on income or lifestyle may accept a premium price, where a budget-conscious segment will not. Segmenting the market also makes price discrimination possible, because it separates the groups.
The product life cycle. This is the influence most often examined, because the strategy changes as the product moves through the phases:
Worked example
A business launches a genuinely new fitness device with no direct competitor. Recommend a pricing strategy and explain what should happen later.
- Identify the position: a new product with no direct competitor, so customers cannot compare it against anything.
- That allows a high price at launch — price skimming — which also recovers development costs quickly.
- Identify what changes: competitors will copy the idea once it proves successful.
- So the price must come down as rivals appear, moving towards competitive pricing during growth and maturity.
- Add the risk, since the question asks for a recommendation.
Answer: Price skimming at launch, charging a high price to early buyers who want it first and recovering development costs quickly. As competitors enter during growth, the price should fall towards the market rate, becoming competitive pricing in maturity. The risk is that a high launch price attracts competitors faster by showing them the margins available.
Before you practise
- Price must cover costs and make a profit, while remaining acceptable to customers.
- Skimming starts high and falls; penetration starts low and rises.
- Competitive pricing follows rivals; cost-plus adds a margin to unit cost; psychological pricing uses figures just under a round number.
- Price discrimination charges different groups different prices for the same product.
- Technology pushes prices down through easy comparison, but allows flexible pricing.
- More competitors and more similar products mean less pricing freedom — differentiation buys room.
- Different market segments will pay different amounts.
- Strategy changes through the life cycle: skimming or penetration at launch, competitive in maturity, reduced in decline.