The Marketing Mix: Price

Price is the second element of the marketing mix. Getting the price right is crucial — charge too much and customers go to competitors; charge too little and the business may not cover its costs. This lesson covers the main pricing strategies used by businesses and the factors that influence pricing decisions.

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Why Is Pricing Important?

Price directly affects:

• Revenue — price x quantity sold = total revenue.
• Demand — generally, higher prices reduce demand (the law of demand).
• Profit — if the price is too low, the business may not cover its costs.
• Brand image — a high price can signal quality; a low price can signal value.
• Competitiveness — the price must be competitive relative to rival products.

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Pricing Strategies

Strategy	Description	When Used	Example
Penetration pricing	Setting a low initial price to attract customers and gain market share	When entering a competitive market	Netflix offered low subscription prices initially
Price skimming	Setting a high initial price and lowering it over time	When launching an innovative product with few competitors	New PlayStation or iPhone launch
Competitive pricing	Setting a price similar to competitors	In competitive markets where products are similar	Petrol stations in the same area
Cost-plus pricing	Adding a percentage markup to the cost of production	When costs are predictable and the business wants a guaranteed margin	A bakery adds 50% to ingredient costs
Psychological pricing	Setting a price that appears cheaper (e.g. £9.99 instead of £10)	Retail and consumer goods	Most supermarket products end in .99
Loss leader pricing	Selling a product at or below cost to attract customers who will buy other items	Supermarkets and large retailers	Tesco selling bread at cost price
Premium pricing	Setting a permanently high price to reflect quality or exclusivity	Luxury and premium brands	Rolex, Louis Vuitton, Tesla
Dynamic pricing	Changing prices based on demand, time, or customer behaviour	Online retail, airlines, ride-hailing	Uber surge pricing; Amazon price changes

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Factors Influencing Pricing Decisions

graph TD
    A[Pricing Decisions] --> B[Costs of production]
    A --> C[Competitor prices]
    A --> D[Target market]
    A --> E[Brand image]
    A --> F[Stage of product life cycle]
    A --> G[Economic conditions]
    A --> H[Level of demand]

Factor	Impact on Pricing
Costs of production	Prices must cover costs to make a profit; rising costs may force prices up
Competitor prices	Businesses must be aware of and respond to competitor pricing
Target market	Premium markets tolerate higher prices; budget markets demand low prices
Brand image	Strong brands can charge more; weak brands may need to compete on price
Product life cycle	New products may use skimming or penetration; mature products may need discounting
Economic conditions	In a recession, consumers are more price-sensitive; in a boom, they may accept higher prices
Level of demand	High demand allows higher prices; low demand may require price reductions
Supply and availability	Scarce products can command higher prices

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Choosing the Right Pricing Strategy

The best pricing strategy depends on the business's objectives and circumstances:

Business Objective	Suitable Pricing Strategy
Entering a new market	Penetration pricing (to build market share quickly)
Launching an innovative product	Price skimming (to maximise early revenue)
Maximising profit	Cost-plus pricing or premium pricing
Competing on price	Competitive pricing
Building brand image	Premium pricing
Increasing footfall	Loss leader pricing

Example: Price Skimming — Apple iPhone

When Apple launches a new iPhone, it sets a high initial price (e.g. £1,199 for the iPhone 16 Pro Max). Early adopters — customers who want the latest technology — are willing to pay the premium. Over time, Apple reduces the price as newer models are launched and competition increases.

Example: Penetration Pricing — Amazon Prime

When Amazon launched Prime Video, it offered the service at a low subscription price to attract customers away from established competitors like Netflix. Once it had built a large customer base, it gradually increased the price.

Exam Tip: In a pricing question, always explain WHY a particular strategy is appropriate for the specific business and situation described. Do not just name a strategy — justify it by linking to the business's objectives, market position, and target customers.

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Price Elasticity of Demand (Higher Tier)

Price elasticity of demand (PED) measures how sensitive demand is to a change in price.

• Price elastic — a small change in price causes a large change in demand (e.g. budget clothing).
• Price inelastic — a change in price has little effect on demand (e.g. petrol, prescription medicine).

Products with many substitutes tend to be price elastic; products with few substitutes or that are necessities tend to be price inelastic.

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Summary

• Price directly affects revenue, profit, demand, and brand image.
• Key pricing strategies include penetration, skimming, competitive, cost-plus, psychological, loss leader, premium, and dynamic pricing.
• Pricing decisions are influenced by costs, competition, target market, brand, product life cycle, and economic conditions.
• The best strategy depends on the business's objectives and market position.
• Price elasticity of demand describes how sensitive demand is to price changes.

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UK case study: Wetherspoon's pricing formula

JD Wetherspoon — the UK pub chain with around 800 outlets — is a masterclass in using competitive and penetration-style pricing to dominate a mature market. Founded by Tim Martin in 1979, Wetherspoon has deliberately built its reputation as the cheapest pub on the UK high street, with a pint of lager often 20–40% cheaper than competitor pubs and a full breakfast for under £5.