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AQA GCSE · Question 01.12 · Marketing
State and explain two pricing methods that a business can use.
State and explain two pricing methods that a business can use.
How to approach this question
For this 4-mark question, you need to provide two distinct pricing methods. For each method:
1. **State** the name of the method clearly (e.g., "Penetration pricing"). This gets you 1 mark.
2. **Explain** how the method works. Describe the process or the idea behind it. This gets you the second mark.
3. Repeat this for a second, different pricing method.
Full Answer
**Method 1: Cost-plus pricing**
**Explanation:** This method involves calculating the total cost of producing a product and then adding a percentage mark-up for profit. For example, if a product costs £10 to make and the business wants a 50% mark-up, the selling price would be £15. This ensures that costs are covered and a profit is made on each unit sold.
**Method 2: Competitive pricing**
**Explanation:** This involves setting a price based on what competitors are charging for similar products. A business might price its product slightly below, the same as, or slightly above its rivals. This method is common in markets with many similar products, as it helps to avoid losing customers to competitors over price.
Businesses use various pricing strategies depending on their objectives, market, and product.
- **Cost-plus pricing:** The simplest method. The firm calculates the average cost per unit and adds a profit margin (mark-up). It guarantees a profit on each item but ignores market demand and competitor prices.
- **Competitive pricing:** Setting prices based on competitors. This can be pricing at the same level (price leadership), slightly below to gain market share, or slightly above if the product has a better quality or brand image.
- **Penetration pricing:** Setting a very low initial price to enter a competitive market and build market share quickly. The price is often raised later.
- **Price skimming:** Launching a new, often innovative, product with a high initial price to maximise revenue from "early adopters" before competitors enter the market. The price is lowered over time.
Common mistakes
✗ Just listing methods without explaining them.
✗ Giving vague explanations, e.g., "setting a price for a product".
✗ Confusing different pricing methods, for example, mixing up penetration and skimming.
Practice the full AQA GCSE Business Paper 2
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