StudyDeck
Dashboard

Price: Types of Pricing Methods

Exam code: 7115
Written by: Ashika|Reviewed by: Caroline Carroll|Updated 2 July 2026

Types of Pricing Strategies

Types of pricing strategies

  • Choosing the right pricing strategy is essential for a business to be profitable, competitive, and successful in the long run

  • By understanding their customers, competitors and costs, businesses can set prices that maximise sales revenue and profits

  • Pricing can play a significant role in the market positioning of the brand and help a firm to compete with rivals

The main pricing strategies

Diagram of pricing strategies in a central box, with arrows pointing to six types: cost plus, penetration, competitive, price skimming, psychological, predatory.
Different types of pricing strategies

1. Cost plus pricing

  • The business calculates the cost of production and then adds a markup to determine the final price

  • The markup covers the cost of production plus the business's desired profit margin

  • This pricing strategy is simple and is commonly used by manufacturers that produce standardised goods, e.g., washing machines

Advantages

Disadvantages

  • A simple and quick method of calculating a price for a product

  • It ensures that a profit is made on each item sold

  • It does not consider the needs of the market 

  • The pricing approach of competitors is ignored

2. Price skimming

  • The business sets a high price for a new product or service when it is first introduced to the market

  • The business will then gradually lower the price to ensure sales continue

Advantages

Disadvantages

  • This is effective when an established brand is introducing a new product and there is a high demand for it, e.g successive models of Apple's Macbook Air

  • The high price helps the business recover its development and marketing costs quickly

  • Only effective when used by strong brands with an established and loyal customer base

  • Loyal customers may become tired of paying high prices for new product versions and look to see what competitors offer

3. Penetration pricing

  • The business sets a low price for a new product or service when it is first introduced

  • This is effective when a business wants to quickly capture market share and attract price-sensitive customers, e.g., many new perfumes launch using penetration pricing

  • Once they have enough customers, the business will start to raise the price

Advantages

Disadvantages

  • Customers are attracted to buy the product at a low price, leading to high sales volume and market share

  • Competitors unable to match or beat the low price are forced out the market, leading to less competition

  • Customers may perceive that the product is of low quality if the product is sold at a low price

  • Selling at a low price limits the amount of profit made

4. Predatory pricing

  • The business sets prices so low that it drives its competitors out of the market

  • This strategy is illegal in many countries as it is considered anti-competitive and harms customers by reducing choice in the market

Advantages

Disadvantages

  • This method allows a business to gain a dominant position in the market

  • It acts as a barrier to entry for firms considering selling in the market

  • Use of this strategy may have a negative impact on a businesses's reputation

  • It is an expensive strategy for which a business needs sufficient finance to fund

5. Competitive pricing

  • The business sets its prices based on its competitors' prices

Advantages

Disadvantages

  • This is effective when a business is in a highly competitive market and wants to maintain its market share

  • The business must continually monitor its competitors' prices and adjust its prices accordingly to remain competitive

6. Promotional pricing

  • This pricing strategy takes into account the customer's emotions, and compulsive behaviours in responding to price promotions

  • E.g., a business may have a Bogof offer - buy one, get one free

  • Generates higher volumes of sales for many products, but lowers the profit per item

7. Premium pricing

  • The business sets a high price for its product, which gives customers an impression of high quality and luxury

  • This is effective for designer brands such as Chanel and Ritz Carlton Hotels

  • Premium pricing should not be confused with price skimming, where a high price is set for a short period at a product's launch 

Advantages

Disadvantages

  • The high price helps the business differentiate its products from competitors

  • It emphasises  exclusivity and improves the value of a brand

  • Premium priced goods often attract attention from celebrities and the media, which reduces the need for promotional activity

  • Large numbers of more price-conscious customers are ignored, which limits sales revenue

  • Premium products require high quality raw materials and components so variable production costs are usually high

Recommending an Appropriate Pricing Strategy

Recommending an appropriate pricing strategy

  • A business needs to make informed decisions about its pricing and increase its chances of success

  • It should carefully consider a range of factors when deciding on an appropriate pricing strategy

Factors to consider

1. Number of USPs or the amount of differentiation

  • 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

2. Technology

  • 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

3. Level of competition

  • 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

4. Strength of the brand

  • 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

5. Stage in the product life cycle

  • 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

6. Costs and the need to make a profit

  • 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

The strategy requires monitoring

  • Retailers may need to adjust their pricing strategies to remain competitive in an online marketplace where customers can easily compare prices e.g www.comparethemarket.com 

  • 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

Was this revision note helpful?

Build on this topic

Check your understandingTry an Exam Question on this topic
Test your recallReinforce key facts and definitions with Flashcards
Price: Types of Pricing Methods · Revision Notes · Business · StudyDeck