2-2-2-Price

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Exam code:1BS0

Types of pricing strategies

Choosing the right pricing strategy is essential for a business to be profitable, competitive, and successful in the long run
Businesses usually focus on one of two options
- High profit margin, lower volume pricing strategies (price skimming strategy) e.g. Marks & Spencer Food
- Lower profit margin, higher volume strategy (penetration pricing strategy) e.g. Tesco

Pricing to improve profit margins

Diagram showing pricing strategies: high margin/low volume as profitable, high margin/high volume as growth, low margin/low volume as loss leader, and low margin/high volume as strategic. — **A business may opt for high prices with low sales volume or low prices with high sales volume**

In the diagram above, the top left and bottom right quadrants are the ones most frequently chosen by businesses and the choice is influenced by the brand and nature of the product
The top right quadrant is where freemium models are usually located
- These firms are able to benefit from high profit margins and high sales volumes e.g Spotify
It is essential that businesses choose a pricing strategy that reflects the brand and quality of the product/service
If they choose the wrong strategy, they can reduce the potential level of profitability

Factors influencing the choice of pricing strategy

By understanding their customers, competitors, and costs, businesses can set prices that maximise revenue and profitability
Pricing can play a significant role in positioning the brand in the market and help a firm to compete effectively
A business needs to consider various factors when setting its pricing strategy
- Understanding these factors can help a business make informed decisions about its pricing and increase its chances of success

Factors to consider when choosing a pricing strategy

Number of USPs/ differentiation	Technology	Level of competition
Products with many USPs and high differentiation can command higher prices E.g Dyson vacuum cleaners have unique features which allow the company to charge a premium price	The use of online platforms and development of new markets has created new pricing strategies E.g. Candy Crush Saga uses a freemium strategy where the initial game is free of charge after which users have to pay for additional features Charging for these features generates a very high profit margin	In highly competitive markets businesses may need to set their prices low to remain competitive E.g. The budget airline industry is highly competitive and airlines keep their prices low so as to increase demand In less competitive markets, businesses may be able to set higher prices
Strength of the brand	Stage in the product life cycle	Costs and the need to make a profit
A strong brand with a loyal customer base can command higher prices E.g. Nike’s strong brand allows it to charge premium prices for its athletic shoes and apparel	In the introduction stage, prices may be set lower to attract customers and build market share In the growth stage, prices can increase as demand for the product increases In the maturity stage, prices may need to be lowered again	Prices must cover the cost of production and provide a reasonable profit margin E.g. A restaurant needs to consider the cost of ingredients, labour, rent, and other expenses when setting menu prices

Adding to the technology point above, retailers have had to adjust their pricing strategies to remain competitive in an online marketplace where customers can easily compare prices, e.g www.comparethemarket.com (opens in a new tab)
Pricing has changed to reflect the rise of price comparison through the use of price matching policies
- Retailers now offer to match the prices of their competitors in order to prevent customers from switching to a competitor with a lower price

Examiner Tips and Tricks

Exam questions frequently ask you to be able to justify the most appropriate pricing strategy for a product or service.

When studying the data provided, consider the points above and then make a recommendation.

For example, in launching a new product with a strong brand identity, it may be appropriate to use a premium pricing strategy in order to recover research and development costs, and then gradually lowering prices over time.

Business GCES EDEXCEL