IB Business Management HLTopic 4 — MarketingPaper 1 & 2Core skill~10 min read
Everyday Pricing Strategies
Price is the only P that brings money in. All the others cost money. Get the price wrong and no amount of clever advertising saves you: too high and nobody buys, too low and you sell plenty while quietly going bust.
📘 What you need to know
A pricing strategy has to cover costs, match what customers will pay, and respond to competitors.
Cost plus: work out the unit cost and add a mark-up.
Penetration: launch low to grab market share quickly, then raise the price.
Price skimming: launch high while there is no competition, then drop the price.
Loss leader: sell one item below cost to pull customers in for everything else.
Predatory: price so low that rivals are forced out. Illegal in many countries.
Premium: a permanently high price that signals luxury and quality.
One business normally uses several strategies across its product range.
Cost plus pricing
The simplest method. Work out what one unit costs to make, then add a percentage mark-up for profit.
Cost plus
Price = unit cost + (unit cost × mark-up %)
WORKED EXAMPLE 1
A washing machine costs $180 per unit to produce. The firm adds a 60% mark-up. Calculate the selling price. [2 marks]
Step 1: Find the mark-up in money0.60 × 180 = 108Step 2: Add it to the cost180 + 108 = 288Selling price = $288A 60% mark-up is not a 60% profit margin. Margin is profit as a share of the price: 108 ÷ 288 = 37.5%.
Cost plus is quick, and it guarantees a profit on every unit sold — if the units sell. Its weakness is that it looks inwards. It ignores what customers are willing to pay and what rivals are charging, so the price can end up either too high to compete or well below what the market would happily have paid.
Penetration and skimming: two ways to launch
These are opposites, and both are about the launch period rather than forever.
Skimming takes the money from impatient early buyers first. Penetration buys market share first and collects the money later. Both end up in roughly the same place.
Strategy
Best when
The catch
Penetration
The market is crowded and you need share fast. Attracts price-sensitive customers and can push weaker rivals out
A low price can signal low quality, and profit per unit is small until the price can be raised
Skimming
The product is genuinely new or high-technology and competition has not arrived yet
Only works while you are alone. Once rivals copy you, the high price collapses
Loss leader, predatory and premium
Loss leader
Charging below cost for one product to pull customers through the door, expecting them to fill their basket with profitable items. Supermarkets do this constantly.
It works when customers really do buy other things. If they walk in, take the cheap item and leave, the business has simply lost money. Smaller rivals also complain that it is unfair, because they cannot afford to subsidise a product.
Predatory
Cutting prices so low that competitors cannot survive, with the plan of raising them once the rivals are gone. It is anti-competitive and illegal in many countries, because customers end up with less choice.
Even where it is allowed, it needs deep pockets: the business has to absorb losses for as long as the price war lasts, and its reputation takes a hit.
Premium
A permanently high price that tells customers this is a luxury product. It emphasises exclusivity, attracts attention, and produces a wide margin. But it ignores every price-conscious customer in the market, and premium products usually need expensive materials to justify the claim.
Premium and skimming look identical on paper and are not the same thing. Skimming is temporary — a high launch price that comes down. Premium is permanent — the price stays high because the price is the message.
Strategy
Advantages
Disadvantages
Cost plus
Simple and quick to calculate, and a profit is made on every unit sold
Ignores what customers will pay and what rivals charge
Loss leader
Pulls customers away from rivals and can shift slow-moving stock
Only works if shoppers buy other items too, and smaller rivals may call it unfair
Predatory
Can win a dominant position and acts as a barrier to entry
Illegal in many countries, expensive to sustain, and damages reputation
Premium
Signals exclusivity, builds brand value, and attracts free media attention
Ignores price-conscious buyers, and high quality inputs push variable costs up
WORKED EXAMPLE 2
A new smoothie brand is launching into a market with four established rivals selling at similar prices. Recommend a pricing strategy. [6 marks]
Step 1: Read the market
Four rivals at similar prices means the market is crowded and competitive, and customers have no reason to switch.
Step 2: Rule strategies out
Skimming needs no competition. Premium needs a reputation the brand does not have yet.
Step 3: Choose and justify
Penetration pricing gives shoppers a reason to try it and builds share quickly.
Penetration pricing, then raise it once customers returnThe condition: the firm must be able to survive thin margins at first, and must raise the price before the low price becomes the brand.
💡 Exam tip
Justify a pricing strategy using three things: costs, customers and competitors. Miss one and the answer looks thin.
Link the strategy to the life cycle stage. Launch pricing and maturity pricing are different problems.
Mark-up and profit margin are not the same. Read the question wording carefully.
If you mention predatory pricing, mention that it is often illegal. That single detail scores.
Remember a business can run several strategies at once across different products.
For evaluation, ask what happens after the strategy works — can the price actually be raised later?
⚠ Common mix-up
Penetration is not the same as a loss leader. Penetration is a low price on your main product, not below cost.
Predatory is not just “cheap”. The aim is to remove competitors.
Skimming is not premium. One is temporary, the other permanent.
Cost plus does not guarantee profit overall. It guarantees profit per unit — only if the units sell.
A high price does not mean high profit. Premium products usually cost far more to make.
Price is not decided once. It changes as the product moves through its life cycle.
Up next: Pricing Tactics for Tougher Markets — the HL material: dynamic pricing, competitive pricing, contribution pricing and price elasticity of demand.
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