Pricing Methods
Price is the second of the four Ps and it decides two things at once — how much revenue a business earns per sale, and how customers judge the product. Price too high and sales fall; price too low and costs are not covered. This lesson covers the five pricing methods named on the specification and shows how a UK business picks the one that fits.
Cost-Plus Pricing
Cost-plus pricing starts with what it costs to make one unit, then adds a fixed mark-up. A corner bakery that spends 60p making a sausage roll and adds a 100% mark-up sells it at £1.20. A small plumber who fits a new tap — £25 parts, £40 labour cost — might add 30% and charge £84.50. Cost-plus is simple, guarantees a margin on each sale and is fair to justify to customers: ‘this is what it cost us plus a living for us’.
The weakness is that cost-plus ignores what customers will actually pay and what rivals are charging. A competitor selling the same tap fitting at £70 will win the job even if your costs were identical. Cost-plus works best for tradespeople, small manufacturers and menu-based businesses where cost is easy to calculate and competition is limited.
Competitor Pricing
Competitor pricing (sometimes called competitive pricing) sets prices close to rivals. The petrol market is the obvious example — BP, Shell and Tesco garages on the same stretch of road post almost identical pump prices because drivers see the board across the street. Budget airlines like Ryanair and easyJet track each other’s fares hour by hour. Competitor pricing protects market share, but it means the business can never stand out on price alone — it has to differentiate through product, promotion or place.
The five pricing methods on the specification are cost-plus, competitor pricing, penetration pricing, price skimming and promotional pricing. Each one suits different products, markets and objectives.
Penetration Pricing
Penetration pricing launches at a deliberately low price to win customers fast. Aldi and Lidl broke into the UK supermarket market this way in the 1990s and 2000s, undercutting Tesco and Sainsbury’s on everyday items until cost-conscious shoppers tried them and stayed. Streaming services like Disney+ launched at introductory prices well below Netflix to grab early subscribers. Once customers are locked in, prices are nudged up — Disney+ has raised its UK monthly price several times since launch. Penetration works well when a market already has rivals and the new entrant needs visibility.
Price Skimming
Price skimming is the opposite strategy: launch high, aim at early adopters, then cut the price as rivals copy the idea. Apple is the textbook case. A new iPhone launches at its highest UK price — fans queue and pay £1,000+ for the latest model — and within 18 months the price is quietly cut as the next model is prepared. Sony and Microsoft did the same with PlayStation and Xbox launches. Skimming only works when the product genuinely has a USP that early adopters want before anyone else; copy-cat products that try skimming look overpriced and stick on the shelves.
Skimming starts high and works downwards. It suits new, innovative products with a clear USP — early adopters pay a premium for being first. Profit per unit is strong at launch but market share builds slowly. The risk is that rivals copy quickly and the price has to fall faster than planned.
Penetration starts low and works upwards. It suits crowded markets where the new entrant needs visibility — profit per unit is thin at launch but market share builds fast. The risk is that customers used to the low price complain when it rises, and rivals may drop their prices too and wipe out the advantage.
Promotional Pricing
Promotional pricing is a short-term cut to boost sales. It covers several tactics students often see in UK shops: 2-for-1 offers, percentage-off sales, clearance rails and loss leaders. A loss leader is an extreme version — a supermarket selling milk, bread or baked beans at or below cost. The aim is not to profit on the milk but to pull the shopper in, expecting them to fill the trolley with higher-margin items. Boxing Day sales at Next, Black Friday TV deals at Currys and ‘meal deals’ at Tesco and Boots all use promotional pricing to shift stock or raise footfall.
The danger is that customers learn to wait for the next offer and refuse to pay the full price. Iceland’s constant half-price freezer deals trained some shoppers never to buy at the posted price. Promotional pricing works best when it is used occasionally and tied to a clear reason — end of season, new product launch, seasonal event.
Pricing decisions are shaped by costs (the floor), the product’s USP, how crowded the market is and what the business is trying to achieve — survive, grow, maximise profit or defend share.
No single method is ‘best’. A brand-new product with a real innovation can skim; a new entrant in a crowded market needs penetration; a tradesperson needs cost-plus; a supermarket needs a mix of promotional pricing and competitor pricing to defend its weekly shop.
Real businesses often use different methods for different products. Tesco skims its Finest range on launch, competitor-prices its core lines against Asda and Sainsbury’s, and runs promotional pricing on selected items every week. The choice depends on the product, the market, the stage of the product life cycle and the business’s objectives.