Marketing Mix: Price (Cambridge International AS Business)
Introduction to pricing methods
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Choosing the right approach to pricing is essential for a business to be profitable, competitive and successful in the long run
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By understanding their customers, competitors and costs, businesses can set prices that maximise sales revenue and profits
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Pricing can play a significant role in a brand's market positioning and helps a firm compete with rivals
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The main types of pricing methods include:
- Competitive pricing
- Penetration pricing
- Price skimming
- Price discrimination
- Dynamic pricing
- Cost-based pricing
- Psychological pricing
The main influences on pricing
| Influence | Explanation | Example |
|---|---|---|
| Costs | - How much it takes to make, distribute and sell the product - A price must at least cover the unit cost, or the firm loses money | - High fixed costs (aircraft, fuel) push airlines such as Ryanair to fill every seat and use "from £29” teaser fares; even a small rise in fuel triggers quick ticket‑price adjustments |
| Price elasticity of demand (PED) | - How sensitive buyers are to a price change - Elastic demand means a small price rise could lower sales, so firms keep prices low and use promotions - Inelastic demand gives room for higher prices | - H&M rarely raises the price of basic t-shirts because its teenage customers can switch to Primark easily - Nintendo held the Switch console near its launch price for years, knowing loyal gamers would still pay |
| Other elements of the marketing mix | - The marketing message needs to be consistent - Premium features and luxury branding justify higher prices - Selling through discount stores often requires lower prices, while selling in boutiques allows for premium pricing - Offer-focused advertising can give customers an expectation of a bargain, restricting future price rises | - Dyson’s Airwrap hair‑styler is priced at around £450 because its engineering, brand reputation and sleek design back the premium price - Gillette often discounts razor handles but prices blades high, knowing users will keep buying refills |
Competitive pricing
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Competitive pricing involves matching or undercutting the prices charged by competitors in order to increase sales
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Businesses can use a range of pricing tactics
- Price matching is commonly used by UK supermarkets to highlight products that are sold at a lower price than rivals
- Refund the difference matches the price of rivals if customers find a product at a lower price in a comparable retail outlet
- Discounts for new customers attract sales away from rivals
Supermarket price matching
Tesco and Sainsbury's match some prices with budget retailer Aldi
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The above image illustrates how businesses engage in a competitive pricing strategy
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Businesses with many products may price some competitively while raising prices on others
- E.g. supermarkets will often use competitively priced alcohol to bring customers in but then raise the prices on other products, such as deli meat
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Evaluating competitive pricing
| Advantages | Disadvantages |
|---|---|
| - Consumer familiarity - Customers may be more likely to accept products because they align with their expectations - Seen as fair and reasonable, which can improve brand image and increase customer loyalty - Market share - Helps gain or maintain market share by offering prices that are in line with or slightly below those of rivals - Particularly important in price-sensitive markets - Flexibility - If a competitor lowers prices, a business can adjust its own prices accordingly - Avoids losing market share whilst waiting for the pricing strategy to be changed | - Lower profit margins - If prices are constantly pushed down to match/beat competitors, it is difficult to maintain healthy profits - Challenging to increase prices even if there are increases in production costs - Brand differentiation - May not allow for differentiation based on features or quality - If products are perceived as similar, consumers make purchasing decisions solely based on price - Race to the bottom - Constantly adjusting prices can lead to a situation where prices keep dropping regardless of the actual value of the product - Limits a businesses ability to set prices based on costs or USP |
Penetration pricing
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Penetration pricing involves launching a product at a deliberately low price to win market share fast
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The firm hopes a high volume will spread fixed costs and lock in customers before increasing the price later
- E.g. Disney+ entered the UK in 2020 at £5.99 per month, well below many rival streaming services
Evaluating penetration pricing
| Advantages | Disadvantages |
|---|---|
| - Rapid sales growth and market share - A low launch price tempts customers to try the product immediately, building a large customer base before rivals respond - Deters new entrants - Potential competitors see low profits and may decide the market is not worth entering | - Low profit margins at the start - Very little is earned on each unit, so it needs to sell in high volumes to break even - Difficulty raising prices later - Customers can feel misled if prices rise sharply, which may damage trust |
Skimming
Price skimming
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Skimming involves setting a high introductory price and lowering it over time
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Early adopters pay more, helping the firm recoup research and launch costs; later price cuts open the market to the mass market
- E.g. Sony’s PlayStation 5 was launched with a premium price, which was gradually reduced as supply increased and a slimmer model arrived
Evaluating price skimming
| Advantages | Disadvantages |
|---|---|
| - Quick recovery of research and development costs - High profit margins help pay back expensive design or technology investments quickly - Creates a prestige image - The initial high price signals exclusivity and high quality, helping the brand stand out | - Attracts rivals - Once the price drops, competitors with cheaper versions may enter and reduce market share - Slower mass adoption - Budget-conscious consumers wait for later price cuts, delaying sales |
Price discrimination
- Price discrimination occurs when a firm charges a different price for the same product in order to maximise its revenue
Types of price discrimination
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First degree
- When a firm separates consumers based on their ability to pay
- E.g market traders can often easily identify high-worth customers and double the price of the product offered , especially where product prices are not displayed
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Second degree
- When a firm gives discounts for bulk buying, e.g 3 for 2 offers
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Third degree
- When a firm charges different prices to different consumers for the same product
- E.g. rail fares are priced differently depending on the time of travel
Evaluating price discrimination
| Advantages | Disadvantages |
|---|---|
| - Some consumers benefit from lower prices, especially those who are more* price-sensitive* (e.g. students or pensioners) - In some cases, higher prices reduce demand, which can be positive if it improves the service - e.g. train services may be less crowded - Total revenue increases, as the firm can charge different prices to different groups based on their willingness to pay - Can help cover fixed costs and support services that may not survive under a single price model | - Many consumers lose out by paying higher prices than others for the same product or service - Can be seen as unfair if those paying more receive no extra benefit - Setting up and enforcing price discrimination, such as requiring ID or monitoring purchase patterns, can increase average costs and require more complex IT systems |
Dynamic pricing
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Dynamic pricing involves continuously adjusting prices in real time to reflect demand, supply and other conditions
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Businesses use dynamic pricing to maximise revenue, stay competitive, and respond quickly to market conditions
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They use algorithms and data, such as time of day, inventory levels and competitor prices to determine prices
- E.g. Uber raises fares during times of peak demand and lowers them when demand falls
Evaluating dynamic pricing
| Advantages | Disadvantages |
|---|---|
| - Maximises revenue in real time - Prices rise when demand is strong and fall to stimulate sales when demand is weak, smoothing overall income - Helps manage limited capacity - For airlines or ride‑sharing, higher prices at peak times ration scarce seats or cars to those who value them most | - Perceived unfairness or unpredictability - Customers may feel exploited if prices surge suddenly, harming brand reputation and loyalty - Requires advanced data systems and constant oversight - Setting up algorithms and monitoring performance adds complexity and cost |
Cost-based pricing
Cost-plus
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This involves the business calculating the cost of production and adding a markup to determine the final price
- The markup covers the cost of production plus the business's desired profit margin
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This pricing strategy is commonly used by manufacturers that produce standardised goods, e.g. washing machines
Contribution pricing
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Contribution pricing involves setting prices that cover direct costs associated with producing a product and also contribute to covering indirect costs
- This method ensures that a business does not make a loss on each product sold
- It requires a business to be able to accurately allocate indirect costs to products in its range
- Care must be taken to ensure that the price set is competitive and meets market expectations
An illustration of contribution pricing
The toy's selling price is determined by adding total indirect costs to an appropriate allocation of direct costs
Evaluating cost-based pricing
| Advantages | Disadvantages |
|---|---|
| - Simple and quick to calculate - The business sets the price by adding a fixed profit margin to the cost, which is easy to apply and understand - Ensures a profit is made on each item sold - As long as the mark-up covers costs, the business can be confident it won’t sell at a loss | - Ignores customer demand and willingness to pay - The price is based on internal costs, not on what the customer values or is willing to pay - Does not consider competitor pricing - This method may result in prices that are too high or too low compared to rival products |
Psychological pricing
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Psychological pricing takes into account the customer's emotions, beliefs and attitudes towards the product
- E.g. a business may set its prices at £9.99 instead of £10 as customers perceive the former as a better value
Evaluating psychological pricing
| Advantages | Disadvantages |
|---|---|
| - Creates the perception of better value - Pricing items at £9.99 instead of £10 can make them seem noticeably cheaper to consumers | - May be seen as manipulative - Some customers may view this strategy as a trick, which can damage trust in the brand |
| - Can increase sales without changing costs - A small price adjustment can increase demand while keeping profit margins almost the same | - Not always effective for high-end products - In premium markets, customers may associate low or odd pricing with lower quality |
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