2.2.4

Pricing Methods

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Pricing Methods - Price Penetration

Price penetration is where a business tries to increase market share by offering a low initial price. Loss leaders work in a similar way to price penetration.

Increase market share

Increase market share

  • When these goods or services enter the market, a business can attract customers from established competitors.
    • Price penetration was used by Apple when they entered the market for activity trackers by launching the Apple Watch. The Apple Watch competed with products by businesses like Fitbit.
Lower short-term profits

Lower short-term profits

  • In the short term, price penetration can lead to lower average profits than would be earned with a higher price.
  • However, market share may be more important for the long-term profitability of a business.
Loss leaders

Loss leaders

  • Loss leaders are products or services that are sold by a business at a price where the business makes a loss (average revenue < average cost).
  • Loss leaders can attract new customers or sell to existing customers, in the hope that they make extra (incidental) purchases.
    • Dollar Shave Club offered to deliver a razor and new razor blades to your house for $1 every month. This was loss making, but it attracted customers who bought extra products.

Pricing Methods - Competitive and Cost-Plus Pricing

There are 2 other forms of pricing that you need to know about: competitive pricing and cost-plus pricing.

Competitive pricing

Competitive pricing

  • Competitive pricing is when a business sets its prices for its products and services based on what other firms in the market are charging.
  • Competitive pricing is used when the products in a market are similar.
  • The petrol sold at petrol stations is usually based on competitive prices. In February 2018, all the petrol stations within 3 miles of Derby city centre were charging 121.9p per litre of petrol.
Cost-plus pricing

Cost-plus pricing

  • Cost-plus pricing is a pricing strategy where a business charges the customer based on what it costs to produce the product or service.
  • They work out exactly what it costs to produce the product (or service) on average and then add a “mark-up” (extra amount) on top of this cost to make sure that the business makes a gross profit.
    • For example, if Kwik Fit bought a Dunlop tyre from its suppliers for £80, then if they added a 25% mark-up, then the tyre would be sold to customers for £100.
Jump to other topics
1

Investigating Small Business

1.1

Enterprise & Entrepreneurship

1.1.1The Dynamic Nature of Businesses1.1.2Risk & Reward1.1.3The Role of Business Enterprise1.1.4The Role of Business Enterprise 21.1.5The Role of the Entrepreneur1.1.6End of Topic Test - Dynamic Nature of Business1.1.7Grade 9 - Dynamic Nature of Business
1.2

Spotting a Business Opportunity

1.2.1Customer Needs1.2.2Market Research1.2.3Market Segmentation1.2.4The Competitive Environment1.2.5Primary & Secondary Market Research1.2.6End of Topic Test - Business Opportunities1.2.7Application Questions - Business Opportunities1.2.8Exam-Style Questions - Market Segmentation1.2.9Diagnostic Misconceptions - Competition
1.3

Putting a Business Idea into Practice

1.3.1Business Aims1.3.2Business Objectives1.3.3Business Revenues & Costs1.3.4Costs - Calculations1.3.5Revenue - Calculations1.3.6Business Profits & Break-Even Analysis1.3.7Profits & Losses - Calculations1.3.8Interest - Calculations1.3.9Cash & Cash Flow1.3.10Cash & Cash Flow 21.3.11Cash Flow - Calculations1.3.12Sources of Business Finance1.3.13End of Topic Test - Business in Practice1.3.14Grade 9 - Business in Practice1.3.15Exam-Style Questions - Business in Practice1.3.16Diagnostic Misconceptions - Profit1.3.17Diagnostic Misconceptions - Company vs Business1.3.18Diagnostic Misconceptions - Economies of Scale1.3.19Diagnostic Misconceptions - Cash Flow1.3.20Diagnostic Misconceptions - Break-even1.3.21Diagnostic Misconceptions - Fixed Costs
1.4

Making the Business Effective

1.4.1The Options for Start-Up & Small Businesses1.4.2Limited Liability1.4.3Franchising & Not-For-Profits1.4.4Business Location1.4.5The Marketing Mix1.4.6Business Plans1.4.7End of Topic Test - Effective Business1.4.8Application Questions - Effective Business1.4.9Exam-Style Questions - Business Plans
1.5

Business Stakeholders

1.5.1Business Stakeholders1.5.2Technology & Business1.5.3Legislation & Business1.5.4Legislation & Business 21.5.5The Economy & Business1.5.6External Influences1.5.7End of Topic Test - Business Stakeholders1.5.8Grade 9 - Business Stakeholders1.5.9Diagnostic Misconceptions - Recessions
2

Building a Business

2.1

Growing the Business

2.1.1Business Growth2.1.2Finance2.1.3Changes in Business Aims & Globalisation2.1.4Ethics & Business2.1.5The Environment & Business2.1.6End of Topic Test - Growing a Business2.1.7Application Questions - Growing a Business2.1.8Exam-Style Questions - Business Growth
2.2

Making Marketing Decisions

2.2.1Product2.2.2Product Life Cycle2.2.3Price2.2.4Pricing Methods2.2.5End of Topic Test - Product & Price2.2.6Grade 9 - Product & Price2.2.7Promotion & Advertising2.2.8PR & Sales Promotions2.2.9Sponsorship & Product Placement2.2.10Promotional Mix2.2.11End of Topic Test - Promotion2.2.12Application Questions - Promotion2.2.13Exam-Style Questions - Promotional Mix2.2.14Place & Wholesalers2.2.15Direct to Consumer2.2.16E-commerce & M-commerce2.2.17Diagnostic Misconceptions - Decreasing Price2.2.18Diagnostic Misconceptions - Advertise vs Promote2.2.19Diagnostic Misconceptions - Social Media
2.3

Making Operational Decisions

2.3.1Job Production2.3.2Batch & Flow Production2.3.3Working with Suppliers2.3.4Effective Supply Chains2.3.5Just In Time & Just In Case2.3.6Managing Quality2.3.7Total Quality Management2.3.8The Sales Process2.3.9End of Topic Test - Operational Decisions2.3.10Grade 9 - Operational Decisions2.3.11Exam-Style Questions - Managing Stock2.3.12Diagnostic Misconceptions - JIT vs JIC
2.4

Making Financial Decisions

2.4.1Gross Profit & Net Profit - Definitions2.4.2Gross Profit - Calculations2.4.3Net Profit - Calculations2.4.4Rate of Return2.4.5Rate of Return - Calculations2.4.6Research & Financial Data2.4.7Marketing Data2.4.8Percentage Change - Calculations
2.5

Making Human Resource Decisions

2.5.1Organisational Structures2.5.2Organisational Structures 22.5.3Recruitment2.5.4Effective Recruitment2.5.5Training a Workforce2.5.6Motivating a Workforce2.5.7End of Topic Tests - Human Resources2.5.8Application Questions - Human Resources2.5.9Exam-Style Questions - Human Resources2.5.10Diagnostic Misconceptions - Owners vs Shareholders2.5.11Diagnostic Misconceptions - Internal Recruitment2.5.12Diagnostic Misconceptions - Employee Motivation

Practice questions on Pricing Methods

Can you answer these? Test yourself with free interactive practice on Seneca — used by over 10 million students.

  1. 1
    Characteristics of loss leaders:True / false
  2. 2
    When Apple first released their Apple watch it was sold at a low price to compete with products from companies like Fitbit. What is this an example of?Multiple choice
  3. 3
    Features of competitive pricing:True / false
  4. 4
    What is the "mark-up" in cost-plus pricing?Multiple choice
  5. 5
    If WHSmith buys a set of Sharpie pens for £5 and add a mark-up of 20%, how much will they sell them for?Multiple choice
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Price

End of Topic Test - Product & Price