Classic example: New iPhone launches at a high price (skimming), then older models are discounted as the next model releases.
Strategies 4 & 5
Competitive & Psychological Pricing
Competitive Pricing
Price set in line with competitors' prices
Common in markets with many similar products (e.g. petrol, supermarkets)
Can price slightly below (undercut) or match rivals
Avoids price wars
Limits ability to earn above-average margins
Psychological Pricing
Price set to create a perception in the consumer's mind
£9.99 feels significantly cheaper than £10 (charm pricing)
£99.99 feels like a bargain compared to £100
Used widely in retail — online and in-store
Very effective at increasing purchase conversion rates
Strategy 6
Premium Pricing
Definition
Setting a high price to reflect the perceived quality, exclusivity or status of a product. The high price itself signals quality.
Advantages
High profit margin per unit
Reinforces brand image as luxury or high-quality
Attracts status-conscious consumers
Exclusivity can drive desire
Examples: Rolex, Louis Vuitton, Porsche, Nespresso
Disadvantages
Limits market to wealthy consumers
Requires strong brand or genuine quality to justify price
Vulnerable to economic downturns — luxury cut first
Competitors may offer similar products cheaper
Decision Making
Choosing the Right Pricing Strategy
New product entering competitive market → Penetration pricing to build market share quickly
Innovative, unique product with early adopters → Price skimming to recoup development costs
Luxury or premium brand → Premium pricing to maintain brand image
Commodity market (petrol, basic food) → Competitive pricing — little room for differentiation
Any retail context → Psychological pricing (£9.99) to maximise conversion
Exam tip: Always justify your recommendation by linking to the specific business context — type of product, level of competition, stage in PLC.
Practice Question 1 of 3
A new streaming service launches at £3.99/month to compete with Netflix (£10.99) and gain subscribers quickly. Once established, it plans to raise prices. Which pricing strategy is this?
APrice skimming
BPenetration pricing
CPremium pricing
DCost-plus pricing
Correct: B. Setting a low initial price to attract customers from established competitors and build market share — with the intention of raising prices later — is classic penetration pricing. It sacrifices short-term profit for long-term market position. Disney+, Apple TV+ and many streaming services have used this approach.
Practice Question 2 of 3
Apple launches a new iPhone model at £1,199. Six months later, when rival Android phones catch up, the price drops to £999. What pricing strategy does Apple use at launch?
APenetration pricing — low price to gain market share
BPrice skimming — high initial price targeting early adopters, then reducing
DPsychological pricing — £1,199 sounds much less than £1,200
Correct: B.Price skimming involves setting a high price at launch to extract maximum revenue from early adopters (those who value being first and will pay a premium). The price then falls as competitors enter and the novelty fades. Apple's iPhone strategy is the most famous example of this approach in business studies.
Practice Question 3 of 3
A supermarket prices its own-brand cornflakes at £1.49, just below the branded version at £1.75. The supermarket's total costs per box are £0.80. Which two pricing strategies are being used simultaneously?
APenetration pricing and price skimming
BCompetitive pricing (priced below rival) and psychological pricing (£1.49 not £1.50)
CCost-plus pricing and premium pricing
DPremium pricing and price skimming
Correct: B. The supermarket is using competitive pricing by pricing below the branded rival (£1.49 vs £1.75), and psychological pricing by ending in .49 rather than £1.50 to make the price feel lower. Cost-plus would give £0.80 × 1.5 = £1.20 — clearly the price is set based on market competition, not purely cost calculations.
Key Takeaways
What to Remember
Cost-plus — cost + mark-up; simple but ignores market conditions
Penetration — low launch price for market share; raise later
Skimming — high launch price for early adopters; reduce over time
Competitive — match or undercut rivals; common in commodity markets
Psychological — £9.99 not £10; creates perception of value
Premium — high price to signal quality or exclusivity; requires strong brand