Pricing methods — common mistakes

In exam answers, always justify your choice of pricing strategy. For example, don't just state 'use penetration pricing'. Explain WHY it is suitable for that specific business context, such as 'Penetration pricing is appropriate for the new soft drink because the market is saturated with competitors and consumers are price-sensitive, allowing the business to quickly gain market share.'

In recommend questions: name method → link to case objective → state cost floor → note one risk.

Yes, and it is very common. A business might use cost-plus as a starting point to establish a 'cost floor' and ensure profitability. Then, it will analyse competitors' prices (competitive pricing) and adjust its price accordingly. Finally, it might set the price at £49.99 instead of £50 (psychological pricing). The final price is often a result of blending multiple strategies.

While related, they are critically different. Competitive pricing is a legal strategy of setting prices in relation to rivals. Predatory pricing is an illegal practice where a dominant firm sets prices below its average variable costs with the specific intent of driving smaller competitors out of business. The key distinctions are the price level (below cost) and the anti-competitive intent, which makes it illegal in most countries.

Not necessarily. The price is low, but it is usually set above the variable cost per unit. This means each unit sold still makes a positive contribution towards covering the business's fixed costs. While overall profit for the business might be very low or even negative during the initial penetration phase, it is not guaranteed that the business is making a loss on every single item sold. It is a strategic investment for future market share and profitability.