The marketing mix — Price

Price is the only P that generates revenue (the others all cost money). Get it wrong and you either leave money on the table or scare customers away. AQA expects you to know six pricing strategies and the role of price elasticity of demand.

Why pricing matters

• Direct effect on revenue — price × volume.
• Brand positioning — premium vs value.
• Demand response — how many will sell at this price?
• Competitive response — rivals match or undercut.
• Profitability — margin × volume.

A small price change can swing profit dramatically. A 5 % price rise on a 10 %-margin product can boost profit by 50 %.

Six pricing strategies

1. Cost-plus pricing

Calculate cost per unit; add a fixed % markup.

• Example: Cost £4 + 25 % markup = £5.
• Used by manufacturers, retailers and service businesses where costs dominate.

Advantages: simple; guarantees margin. Disadvantages: ignores customer value and competition; may price out of market or leave money on table.

2. Penetration pricing

Low launch price to grab market share quickly. Once established, raise price.

• Example: Aldi entering UK market; new streaming services.
• Works in markets with switching cost or where being first wins.

Advantages: fast market share; deters competitors. Disadvantages: low initial profit; customers may resist later price rises.

3. Skimming (price skimming)

High launch price aimed at early adopters; lower over time as competition arrives.

• Example: new Apple iPhones; new pharmaceutical drugs after patent.
• Works for innovative products with high perceived value.

Advantages: high early margins; recoups R&D fast. Disadvantages: limited initial volume; attracts competitors.

4. Competitor pricing

Set price by reference to rivals — same as, slightly above or below.

• Example: Tesco's "Aldi Price Match"; petrol stations.
• Common in oligopolies with similar products.

Advantages: avoids price war; safe. Disadvantages: ignores own costs and customer value.

5. Promotional pricing

Temporarily lower prices to drive sales.

• Loss leaders — sell below cost to draw customers in (Tesco bread).
• BOGOF (buy-one-get-one-free).
• Seasonal sales — Black Friday, January sales.
• Multi-buys — 3 for £10.

Advantages: short-term volume; clears stock. Disadvantages: erodes margin; trains customers to wait for sales.

6. Loss leader

Specific case of promotional — sell at or below cost to attract customers who buy other items at full price.

• Example: supermarket bread, milk; Apple Store entry products.

Price elasticity of demand (PED)

How sensitive demand is to a change in price.

Formula: PED = % change in quantity demanded ÷ % change in price.

• |PED| > 1 — elastic demand. Small price rise causes big drop in demand. Cuts boost revenue. Examples: luxury goods, restaurant meals, branded clothing.
• |PED| < 1 — inelastic demand. Price rise has small effect on demand. Rises boost revenue. Examples: petrol, cigarettes, prescription drugs, salt.
• PED = 1 — unit elastic. Revenue unchanged.

Factors affecting PED

• Substitutes available — many = elastic; few = inelastic.
• Necessity vs luxury — necessities inelastic (insulin); luxuries elastic.
• Brand loyalty — high loyalty = inelastic.
• Time — short-term inelastic, long-term elastic (oil price → eventually shifts to EVs).
• Proportion of income — small purchases inelastic, big purchases elastic.

Why PED matters for pricing

• Inelastic products: raise price for more revenue (petrol, cigarettes).
• Elastic products: cut price to win share (fashion sale).
• Branding seeks to make demand more inelastic (Apple's premium pricing power).

How to choose a strategy

Factors to consider:

• Costs — must cover them long-term.
• Customer perceived value — what are they willing to pay?
• Competition — how do rivals price?
• Brand position — premium vs value.
• Life cycle stage — skim at launch; promote in maturity.
• Income elasticity — luxury suffers in recession.

Real-world examples

• iPhone — skimming. Launches at £1 000+; price falls over 2–3 years.
• Aldi UK launch — penetration. Built share before raising prices.
• Tesco "Aldi Price Match" — competitor pricing. Match key items to retain price-sensitive customers.
• Black Friday — promotional pricing. £8.7 bn UK sales in 2023.
• Petrol — inelastic; demand barely changes when prices rise — until alternatives (EVs) become viable.

Examiner tips

For 6+ mark questions, match the strategy to the situation — life cycle stage, competition, costs, brand. Always discuss the trade-off (margin vs volume) and conclude with a recommendation.