IB Business Management SLTopic 4 — The Seven PsPaper 1 & 2Core skill~10 min read
Pricing Strategies
Price is the only element of the marketing mix that brings money in. Everything else — the packaging, the adverts, the staff training — is a cost. Get the price wrong and no amount of good marketing elsewhere will save the product.
📚 What you need to know
Price is the only element of the mix that relates directly to revenue.
Firms set price by weighing up costs, competitors, customers and perceived value.
The five strategies you need are cost plus, penetration, loss leader, predatory and premium.
Premium pricing is a high price kept permanently; price skimming is a high price for a short period at launch.
Predatory pricing is illegal in many countries because it is anti-competitive.
A business can use more than one strategy across its product range at the same time.
The five strategies
Note that only cost plus starts from the firm’s own costs. The other four all start from what rivals or customers are doing.
Strategy
Explanation
Advantages
Disadvantages
Cost plus
Work out the cost of production, then add a markup to reach the final price. The markup covers costs plus the desired profit margin. Common among manufacturers of standardised goods
Simple and quick to calculate, and it guarantees a profit is made on every item sold
It ignores what the market will bear and takes no account of what competitors charge
Penetration
Set a low price for a new product when it is first introduced, then raise it once enough customers have been won
Attracts price-sensitive buyers quickly, building sales volume and market share. Rivals who cannot match the price may leave the market
Customers may read the low price as low quality, and profit per unit is squeezed while the price stays down
Loss leader
Charge below the average cost of a product to draw customers in, hoping they buy other profitable items at the same time. Widely used by large supermarkets
An effective way of persuading customers to switch brands or stores, and losses are limited where stock turnover is high
If shoppers buy only the loss leader, the business simply makes a loss. Smaller rivals may claim it is unfair competition
Predatory
Set prices so low that competitors are driven out of the market altogether
Can give the firm a dominant position and acts as a barrier to entry for anyone considering the market
Illegal in many countries as anti-competitive. It is expensive to sustain and can damage the firm’s reputation
Premium
Set a permanently high price to give an impression of quality and luxury. Effective for designer brands and luxury hotels
Emphasises exclusivity, raises brand value, and often attracts media attention that reduces the need for advertising
Price-conscious customers are ignored, which limits sales volume, and high-quality inputs push variable costs up
Premium is not skimming. Premium pricing keeps the price high forever, because the price is the positioning. Skimming charges a high price only for a short period at launch, to earn back development costs from the customers most eager to buy, then drops it. Confusing the two is one of the most common errors in this topic.
How prices move over time
The easiest way to keep these apart is to draw them. Each strategy has a different shape once you plot price against time.
Skimming is aimed at people who want it first and will pay for it. Penetration is aimed at people who will switch brands for a bargain. Premium is aimed at people for whom the high price is part of the appeal.
Calculating a cost plus price
Cost plus pricing
price = unit cost + (unit cost × markup %)
WORKED EXAMPLE
A firm makes a garden tool at a unit cost of $8.60 and applies a markup of 35%. Calculate the selling price. [2 marks]
Step 1: find the markup in money0.35 × 8.60 = 3.01Step 2: add it to the unit cost8.60 + 3.01 = 11.61Selling price = $11.61The one-step version, 8.60 × 1.35, gives the same answer. Markup is always a percentage of cost, not of the selling price.
Choosing a strategy
Exam questions almost always ask you to justify the most appropriate strategy for a particular firm. Work through the situation rather than reciting the list.
🧩 How to justify a pricing decision
What stage is the product at? A launch into a crowded market points to penetration; a genuinely new technology points to skimming.
How competitive is the market? Many similar rivals means price matters a lot; a strong USP means the firm can hold a higher price.
What is the positioning? A luxury image and a discount price contradict each other, so premium pricing must match the rest of the mix.
Can the firm afford it? Penetration and loss leaders both mean accepting thin or negative margins for a while, which needs cash reserves.
Then judge. Say what could go wrong — a price war, a damaged brand image, or customers who never accept the later price rise.
WORKED EXAMPLE
A new sandwich shop is opening on a street that already has four established competitors. Recommend a pricing strategy. [6 marks]
Step 1: read the marketFour rivals already exist, so this is a competitive market with no unmet demand. Customers have a habit of going somewhere else and need a reason to change.Step 2: rule strategies outPremium pricing needs a reputation the shop has not built yet. Predatory pricing is illegal in many countries and unaffordable for a start-up. Cost plus ignores what the four rivals are charging.Penetration pricingStep 3: justify itA low opening price gives people a concrete reason to try the new shop, building sales volume and share quickly. Once regular customers exist, the price can be raised towards the market rate.Step 4: judge itThe risks are real: thin margins at the very moment the shop needs cash, customers who leave as soon as the price rises, and rivals who simply match the discount. It should pair the low price with something harder to copy, such as faster service, so there is a reason to stay.
💡 Exam tip
Justify, do not describe. Questions ask which strategy is most appropriate and why — the marks are in the “why”.
Use the data. If the stimulus gives costs, competitor prices or a target market, your recommendation must refer to them.
Check the price fits the rest of the mix. Premium pricing with cheap packaging and no service does not work.
Show the calculation clearly for cost plus questions. Method marks are available even if the arithmetic slips.
Mention that firms use several strategies at once across a product range. That is a strong evaluative point.
⚠️ Common mix-up
Premium pricing versus price skimming. Permanent high price versus a short high price at launch.
Loss leader versus predatory pricing. A loss leader pulls customers towards other profitable products; predatory pricing aims to destroy competitors.
Assuming a low price always increases revenue. It only does so if demand rises enough to make up for the lower price per unit.
Applying the markup to the selling price. Cost plus markup is a percentage of the cost.
Recommending premium pricing for an unknown brand. Without a reputation, a high price simply loses the sale.
Forgetting price is the only revenue element. Every other P costs money; that contrast is worth stating.
Up next: Promotion and Advertising Methods — above the line, below the line, and why the budget usually decides the answer.
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