Price (Cambridge International IGCSE Business)
Exam board Cambridge International · IGCSEUpdated 2025-08-27
Introduction to pricing methods
- Choosing the right pricing method is essential for a business to be profitable, competitive, and successful in the long run
- By understanding their customers, competitors and costs, businesses can set prices that maximise sales revenue and profits
- Pricing can play a significant role in the market positioning of the brand and help a firm to compete with rivals
Pricing methods
Common pricing methods include cost-plus, penetration and skimming
Cost-plus pricing
Spec point — "pricing methods: cost-plus, competitive, penetration, skimming, dynamic advantages and disadvantages of different pricing methods"
Cost-plus pricing
- The business calculates the cost of production and then adds a markup to determine the final price
- The markup covers the cost of production plus the business's desired profit margin
- This pricing strategy is simple and is commonly used by manufacturers that produce standardised goods, e.g., washing machines
| Advantages | Disadvantages |
|---|---|
| - A simple and quick method of calculating a price for a product - It ensures that a profit is made on each item sold | - It does not consider the needs of the market - Pricing methods of competitors are ignored |
Competitive pricing
- Competitive pricing is when a business sets its prices based on what its competitors are charging
- It is common in markets where there are many similar products, and customers can easily compare prices
- The goal is to attract or keep customers by offering prices that match or beat rivals
| Advantages | Disadvantages |
|---|---|
| - Helps the business stay competitive and protect its market share - Can attract price-sensitive customers who compare options before buying | - Requires regular monitoring of competitors’ prices, which can be time-consuming - It doesn’t always reflect the quality or value of the product |
Exam Hint Watch out for confusing cost-plus pricing with competitive pricing – cost-plus is based on adding a mark-up to costs, while competitive depends on rivals’ prices
Penetration pricing
- The business sets a low price for a new product or service when it is first introduced
- This is effective when a business wants to quickly capture market share and attract price-sensitive customers, e.g., many new perfumes launch using penetration pricing
- Once they have enough customers, the business will start to raise the price
| Advantages | Disadvantages |
|---|---|
| - Customers are attracted to buy the product at a low price, leading to high sales volume and market share - Competitors unable to match or beat the low price are forced out the market, leading to less competition | - Customers may perceive that the product is of low quality if the product is sold at a low price - Selling at a low price limits the amount of profit made |
Skimming
- Setting a high price for a new product or service when it is first introduced to the market
- The price is gradually lowered to ensure sales continue
| Advantages | Disadvantages |
|---|---|
| - Works well for strong brands launching new, in-demand products (e.g. Apple) - High prices at launch help quickly recover research and marketing costs | - It is only suitable for well-known brands with loyal customers - Customers may get tired of high prices and switch to cheaper competitors |
Dynamic pricing
-
Continuously adjusting prices in real time to reflect demand, supply and other conditions
-
Uses algorithms and data, such as time of day, inventory levels and competitor prices
- For example, Uber raises fares during times of peak demand and lowers them when demand falls
| Advantages | Disadvantages |
|---|---|
| - Prices go up when demand is high and fall when demand is low, helping to keep income steady - Businesses like airlines or ride-sharing apps can charge more during busy times to make sure seats or cars go to people who really want them | - Customers may feel upset if prices rise suddenly, which can damage brand trust - It relies on advanced technology and constant monitoring, which can be costly and hard to manage. |
Recommending a suitable pricing method
Spec point — recommend and justify an appropriate pricing method for a given situation
- A business should carefully consider a range of factors when deciding on an appropriate pricing method
Factors to consider when choosing a pricing method
| Factor | Explanation | Example |
|---|---|---|
| USPs and differentiation | - Products with more unique features can often be sold at higher prices | - Dyson vacuum cleaners have special features that allow premium pricing |
| Technology | - Online platforms have enabled new pricing models, like offering a free product with paid upgrades | - Farmville is free to play but users pay for extra features, creating high profit margins |
| Level of competition | - In very competitive markets, businesses may have to set lower prices to attract customers | - Budget airlines keep prices low to compete for demand in a crowded market |
| Strength of the brand | - Well-known brands with loyal customers can usually charge more for their products | - Nike can charge premium prices because of its strong global brand |
| Stage in the product life cycle | - Prices often change as the product moves through its life cycle - It may be lower at launch, higher during growth and lower again at maturity | - Samsung often reduces the price of its older Galaxy phone models once newer versions are released |
| Costs and the need to make a profit | - Prices should cover all costs and allow the business to make a profit | - The Ivy sets menu prices to cover high-quality ingredients, experienced chefs, elegant décor and central city rent |
Case Study Pricing Methods for the Launch of Fyool
FyooL is a New Zealand-based start-up preparing to launch a range of healthy, ready-to-drink protein shakes aimed at active young adults
The health drinks market is highly competitive, and FyooL's team is considering different pricing methods
Each key member of the business has their own view
Pricing method Supported by Reason Penetration pricing Marketing Manager - She wants to create strong interest early on, helping FyooL stand out
- She is convinced it will encourage customers to try the shakes even if they already buy other brandsCost-plus pricing Finance Manager - He wants to ensure each unit covers its costs and earns a profit
- As FyooL is a new business, he prefers a simple, low-risk approachSkimming Product Development Lead - She believes FyooL’s premium ingredients justify a high price at launch
- She feels this method matches FyooL's image as a high-quality, health-focused productRecommendation:
- FyooL should choose penetration pricing for its product launch
- As a new brand entering a competitive market, it needs to attract attention quickly
- The Marketing Manager’s view is the most realistic for building awareness and gaining loyal customers early on
- Once demand grows and the brand becomes known, FyooL can review its pricing and possibly increase it
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