Pricing methods Edexcel International GCSE Business revision
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In plain words
Set the price too high and nobody buys. Set it too low and there is no profit. Getting it right depends on what the product costs to make, what rivals charge, and what the business is trying to do.
There are five methods to know, and each suits a different situation.
6 things to know
- Cost-plus: add a percentage (the mark-up) to the cost of making each unit. It guarantees a profit on each sale, but takes no notice of competitors or of what customers will pay.
- Competitive: set the price in line with competitors'. It keeps the business in the market, but may leave little profit.
- Penetration: launch at a low price to win market share quickly, then raise it. Sales build fast, but early profit is low.
- Skimming: launch a new or unique product at a high price, then lower it later. Profit per unit is high and development costs are recovered, but it attracts competitors.
- Promotional: cut the price for a short time to boost sales or clear stock.
- If demand is price elastic, a price cut raises sales by a bigger percentage and revenue goes up. If demand is price inelastic, a price rise loses few sales and revenue goes up.
Worked example
A business makes a lamp for $8 and adds a mark-up of 25%. What price does it charge?
- Mark-up = 25% of 8 = 0.25 × 8 = $2.
- Price = cost + mark-up = 8 + 2.
- The price is $10.
Tips and tricks
- Penetration and skimming are both for new products, and they are opposites: low first, or high first.
- Match the method to the case: skimming for a new phone with no rivals, penetration for a new brand entering a crowded market.
It lands in your notebook with its questions as flashcards.
Pricing methods: 5 questions and answers
These are the quiz’s questions. Do the quiz first, then come back here for the ones that got you.
A firm sets a low price for a new product to gain market share quickly. This is
A low starting price pulls customers in.
A new games console is launched at a very high price, which is reduced a year later. This is
The first buyers pay the most.
A product costs $20 to make and the mark-up is 40%. What is the selling price?
40% of 20 is 8, and 20 + 8 = $28.
Which is a disadvantage of cost-plus pricing?
The price may end up too high or too low for the market.
Demand for a product is price inelastic. If the business raises the price, its revenue will
Few sales are lost, and each one brings in more.
Quiz
5 questions
Tap an answer and you’ll see straight away whether it’s right, and why.
Worksheet
3 questions, 8 marks. Write your answers on paper, then check them.
Pricing methods
Edexcel International GCSE Business 4BS1 · 8 marks · papermunch.org
Name ______________________________ Date ______________
A business makes a product for $12 and uses a mark-up of 50%. Calculate the selling price.[2]
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$18. Mark-up = 0.5 × 12 = $6, and 12 + 6 = 18.
Explain why a business might use penetration pricing for a new breakfast cereal.[3]
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The market is crowded with established brands. A low price encourages customers to try the new cereal, so it gains market share quickly. The price can be raised once customers are loyal.
Explain one advantage and one disadvantage of price skimming.[3]
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Advantage: the high price gives a high profit on each unit, which helps to recover the cost of developing the product. Disadvantage: the high price and profit attract competitors, and it puts off some customers.
Answers: Pricing methods
- 1. $18. Mark-up = 0.5 × 12 = $6, and 12 + 6 = 18.
- 2. The market is crowded with established brands. A low price encourages customers to try the new cereal, so it gains market share quickly. The price can be raised once customers are loyal.
- 3. Advantage: the high price gives a high profit on each unit, which helps to recover the cost of developing the product. Disadvantage: the high price and profit attract competitors, and it puts off some customers.