Price

Price is the amount charged to customers for a product or service. It is one of the four Ps of the marketing mix, and it is the only one that brings money in: product, promotion and place all cost money to provide.

Price is closely linked to four things:

• Demand — how many customers are willing and able to buy.
• Sales revenue — price multiplied by the quantity sold.
• Profit — what is left of that revenue once costs are paid.
• Perceived value — what customers believe the product is worth, which shapes how the brand is seen.

For example, a skateboard shop charges £60 and sells 200 boards a month, giving revenue of £60 × 200 = £12,000. Dropping the price to £45 might bring in 260 buyers, but that is only £11,700 — more sales, less revenue, and a smaller amount left from each board to cover costs.

Too high or too low

A price that is too high can deter customers and push them towards a cheaper rival, so sales volume falls. A price that is too low earns little from each unit, which may not cover costs and leaves little profit; it can also make customers think the product is cheaply made, which damages brand image.

Factors that shape a price

• Costs of making or supplying the product — the price must cover these if the business is to profit.
• Customers' willingness and ability to pay — a student and a wealthy professional will accept very different prices.
• Competitors' prices — customers compare, so a business needs a reason to charge more.
• Product quality — a well-made, long-lasting item can justify a higher price than a basic one.
• Availability — a product that is scarce or hard to find can carry a high price, while one sold by many rivals has to compete on other features.

Price is only one factor customers weigh up. Quality, customer service, convenience, availability and brand all affect whether someone buys, so a low price alone will not sell a poor product, and a high price can still work if the rest of the mix is strong.

Cost-based pricing (also called cost-plus pricing) is a pricing strategy where a business calculates the cost of making or supplying one unit of a product, then adds a mark-up percentage to provide profit. The mark-up is a percentage of the unit cost, so it is added on top of the cost rather than taken out of the selling price.

How it works

For example, a small business makes scented candles. Wax, a jar, a wick and labour cost £6 per candle. The owner chooses a 50% mark-up. The mark-up is £6 × 50% = £3, so the selling price is £6 + £3 = £9. If costs rise to £7, the same 50% mark-up gives a price of £10.50, so the price still covers the higher cost and adds profit.

Advantages and drawbacks

Cost-based pricing can ensure the price covers costs and includes a profit margin, provided the costs are calculated accurately. It is simple to apply because the business starts from figures it already knows.

However, it ignores customers' willingness to pay and competitors' prices. A product with high costs may be given a high selling price, which could make it uncompetitive. Cost-based pricing therefore does not guarantee a profit: customers may refuse to buy if the price is too high, so the business may sell few units.

Competitive pricing (also called competition-based pricing) means setting a price close to what rival businesses charge for a similar product, rather than working it out from your own costs alone. Customers can compare prices easily, so charging far more than the rest of the market can send them to a rival.

Undercutting or charging more

A business can set its price slightly below its rivals — undercutting — to win customers who are choosing mainly on price. It can also charge a little more if customers believe its product is better quality or its brand is stronger, because the higher price then feels worth paying. Setting a price roughly in line with rivals means you are not obviously the dearest option, which helps a business avoid losing customers on price alone. Competitive pricing does not have to mean being the cheapest.

For example, three shops in the same town sell hanging baskets and two of them charge £18. The third spends £11 on plants and materials for each basket and charges £17, so it looks like the best deal while still making £6 per basket. Cutting the price to £12 would leave only £1 per basket, which may not cover rent and wages, so undercutting too far risks a loss. Charging £21 instead would only work if its baskets were noticeably fuller, so customers could see the extra value.

How competition influences price

Competition can stop a business using the pricing strategy it preferred, because customers may have a cheaper or better alternative if a rival:

• launches a newer product
• improves an existing product
• offers better customer service
• reduces its prices
• runs a sale

A business hoping to charge a high price may then have to lower it, or improve its own offer quickly, to protect its sales. The market has shaped the price, not just the business's own costs.

Penetration pricing is a pricing strategy where a business sets a low initial price for a new product or service and then gradually increases it over time. The low price is only the starting point: it is designed to rise once customers are established, so it is different from a strategy that keeps prices low for good.

Why a business does it

A low launch price aims to attract customers quickly. When a product is new, customers have no experience of it and may be unwilling to pay much, so a low price encourages them to give it a try. If they like it, some will stay loyal, and because they are already used to buying from that business many will accept the later price rise. Winning lots of customers early also helps the business build market share and establish a customer base before competitors react.

Worked example

A new hand car wash, SparkleWash, charges £4 a wash for its first two months and plans to put the price up to £7. If it washes 500 cars a month, it takes £2,000 a month at the low price. The same 500 cars paying £7 would bring in £3,500 a month. The gap shows the trade-off: the business earns much less per customer while the price is low, in the hope of keeping those customers once the price rises.

The drawbacks

Profits are low while the price is low, so the business needs enough cash to survive this period. There is also no guarantee that customers will stay when the price rises — some may switch to a rival or simply stop buying, so the business ends up with fewer customers than it planned and a price that is no longer a reason to buy from it.

Price skimming is a pricing strategy where a business launches a product at a high price and then lowers that price over time. The first customers pay more to own the product early, while later customers buy once the price becomes more affordable.

It suits a product where initial demand is expected to be high, so enough customers will pay the high launch price. For example, a company launches a new smart coffee machine at £650. Keen customers who want the latest gadget in their kitchen buy at launch. Six months later, the price drops to £520, then to £450 as rival machines appear and the business needs to attract shoppers who would not pay £650. The business earns a high revenue per unit from early buyers, which can maximise profit from customers willing to pay a premium. The high price can also make the product seem desirable and special.

However, price skimming may deter some customers who cannot or will not pay the launch price. Some of them wait for the reduction. This is a risk because, by the time the price falls, a newer or more attractive product may be on sale, so those customers buy from a rival instead. Price skimming is often associated with new high-technology products, where early buyers value having the latest version.

Premium pricing means charging a consistently high price for a product and keeping it high over time. High-end and luxury brands, such as a premium watch maker or a designer sunglasses label, use it to signal quality and status rather than to compete on price.

The strategy relies on an exclusive image and desirability. Customers pay more because the product is seen as special, well made or a status symbol. Not every customer can afford it, and that can add to its appeal: owning something expensive and less common makes customers feel they are buying into an exclusive group. The high price must match the quality, packaging, service and brand story, or customers will not accept it. A premium price is not simply a high price for a good product: the price itself has to stay high over time to build that image.

A premium price can support a high profit margin because the business keeps more from each sale than it would at a lower price. Even if it sells fewer units, it may earn far more per item. For example, a small brand sells handmade desk lamps for £180. Materials and labour cost £60, leaving £120 from each lamp before other costs. Cutting the price to £90 might sell more lamps, but each sale would leave only £30, and the luxury image could be damaged.

Demand can fall if customers' incomes fall. They may decide they cannot justify the high price and switch to cheaper substitutes. A business charging premium prices therefore depends on customers still being willing and able to pay, and on protecting its exclusive image during tougher times.

Predatory pricing is an aggressive pricing strategy where a business sets its prices very low, often below its own costs, to make it hard for competitors to survive. The aim is to take customers away from rivals so their sales and profits fall until they are forced to leave the market.

If it works, the business can eliminate competition and become the main or only seller in its market. It can then raise prices, because customers have fewer alternatives, and recover the money it lost while prices were low. This only works if the business can afford to make losses for as long as it takes, so it usually needs large cash reserves or other products that are still earning profit.

Why it is high risk

Predatory pricing is dangerous because each sale may bring in less money than it costs to provide. A business selling below cost loses money on every unit sold, so the longer a price war lasts, the bigger the losses grow. There is no guarantee that rivals will give up, and a stronger competitor might be able to keep going for longer. Even if competitors leave, the business must eventually raise prices to stop losing money, and customers may then switch to another supplier or stop buying. For these reasons, predatory pricing is not sustainable in the long term.

It is not the same as penetration pricing. Penetration pricing starts low and then rises gradually to build sales, while predatory pricing is deliberately set low to remove competitors.

Worked example: Fernway Soft Play charges £6 per child and it costs £3.50 per child to run a session. When a new play centre opens nearby, Fernway cuts its price to £1 per child. It now loses £2.50 on every child, but it hopes the rival will close. If the rival leaves after four months, Fernway can raise its price to £7. If the rival stays, Fernway keeps making losses and may run out of cash.

Psychological pricing is a pricing strategy where a business sets a price so that it looks more attractive, making customers believe they are getting a better deal. The customer saves only a few pence — what really changes is how the price looks.

Just below a round figure

The most common method is to set the price a little below a round number. A trampoline park might charge £12.95 for a jump session instead of £13, or a bike shop might label a helmet £39.95 rather than £40. It also works on more expensive items: a music shop could price a guitar at £249 instead of £250. Psychological pricing is not simply about charging a low price — it is about making whatever price is charged look better.

It works because of the way you read a number. You read from left to right and notice the first part of the price — the 12 or the 39 — so your brain files it as “about twelve pounds” rather than “thirteen”. Paying £39.95 feels much closer to £39 than to £40, even though the difference is only 5p.

Why a business would use it

• It makes the price appear lower while keeping almost all of the revenue: £39.95 is only 5p less than £40, yet it looks noticeably cheaper.
• It can tip a customer who is comparing two similar products towards the one that seems better value.
• The “bargain” feel encourages customers to go ahead and buy.

The effect is about perception, so it suits everyday, lower-priced products where customers are price-sensitive. It is a poor fit for a luxury brand trying to create an exclusive image, where a round, high price can feel more special than £249.

Technology can influence the price a business charges. A product built with new technology that rivals do not yet have may be sold at a premium price — a price above the normal level — because many customers may pay more for the extra features, convenience or performance.

Why new technology can support a higher price

When a business launches something genuinely new, there may be little direct competition at first. Customers who want the latest version can compare it with older alternatives and see a clear difference. The business can set a higher price to cover the cost of research and development and to earn a larger profit on each sale. For example, a company launches a robot lawnmower with GPS mapping that cuts the grass in neat stripes without any boundary wire. Rivals' mowers still need wire buried in the lawn, so the new model can sell for £1,200 while older models sell for around £600.

Why older products may need a lower price

Technology moves on quickly. Once a newer version appears, the older product no longer looks special. Customers can see that the new model has better features, and rival businesses may also have brought out their own improved products. To keep selling the older item, the business often has to reduce its price so it still looks like good value. This can keep sales coming in and clear old stock, even though the profit made on each unit is smaller. If the robot lawnmower maker then releases a model that avoids toys and pets automatically, the earlier GPS model may be cut to £750 to stay competitive against both the new version and rivals' mowers.

A technological lead can let a business charge more for a time before prices fall back as rivals catch up.

Market segments are groups of customers with similar characteristics, such as age, income or lifestyle. Each segment may have different incomes, needs and willingness to pay, so the price that suits one group may be wrong for another. The price must suit the target segment.

Why segments pay different prices

A price must match what the target segment can afford and values. Customers on lower incomes are usually more price sensitive, while customers who need convenience or exclusivity may accept a higher price. For example, a soft-play centre might use these prices:

Different strategies for different segments

A business may use a different pricing strategy for each segment. A segment that values luxury or exclusivity might be charged a consistently high price (premium pricing), while a price-sensitive segment might see a lower price. Another segment might be given a price designed to look more attractive (psychological pricing). The strategy should fit the segment's income and what it values, not just the business's costs.

A product's position in the product life cycle influences the pricing strategy a business chooses. Each stage changes demand, competition and how much customers are willing to pay, so the strategy should be reviewed as the product moves through the cycle.

Introduction and growth

At introduction, you might use price skimming if the product is innovative and demand from early customers is high. A high launch price earns more revenue per sale before rivals copy the idea. Alternatively, penetration pricing sets a low price to attract customers quickly and build market share. For example, a new app-controlled plant-watering device could launch at £85 to target keen gardeners, then fall later. A new budget online homework club could instead start at £3 a month to win users quickly.

In growth, sales rise but competitors may enter the market. Your price may need adjusting downwards, or keeping in line with rivals, so customers do not switch. If your product has a strong feature, you may hold a higher price.

Maturity and decline

In maturity, sales growth slows and competition is strong. Competitive pricing sets a price close to rivals, while psychological pricing makes a price appear lower than it is, often by ending just below a round figure. Both can help defend market share.

In decline, demand falls. Lower prices can clear remaining stock and attract customers who are looking for a bargain before the product is withdrawn. The lower price may cut profit per unit, but selling unsold stock is better than leaving it in storage.

Businesses may raise or lower their price for several reasons, and each change affects demand, revenue and profit, so the decision needs thinking through.

Reasons to put the price up

• Costs have risen. If materials, wages or fuel cost more, each sale leaves less profit, so a higher price restores the gap between revenue and costs.
• The brand is strong or the product has improved. Customers who trust a brand, or who can see better quality, are often willing to pay more, so the business can charge extra without losing many sales.
• To raise revenue and profit. Selling a similar number of units at a higher price brings in more revenue, and if costs stay the same, profit rises too. This only works while customers will still buy.

For example, a mobile pet-grooming van charges £30 a groom. Fuel and shampoo costs then climb by £2 per appointment, squeezing the margin, so the owner raises the price to £32 to protect it. Regular customers who book every month accept the change because they value the convenience.

Reasons to put the price down

A lower price can attract new customers and increase demand, so the business sells a larger sales volume. But each sale now brings in less revenue per unit, and if costs per unit stay the same, the profit margin on every item shrinks. Total profit only improves if the extra units sold more than make up for the smaller margin.

Take a Saturday art club charging £12 a session with 40 children, bringing in £480. At £10 it needs 48 children just to bring in the same revenue. If materials cost £5 a child, the margin per place drops from £7 to £5, so even with 48 children profit falls from £280 to £240; it would take 56 to match the old profit.

Evaluating a pricing decision means judging its overall effect on total profit, not just asking whether it pulls in more customers. A price change only works if the extra sales, or the higher amount charged per unit, more than cover what the business gives up.

What decides the outcome

• How much demand changes: a small cut may bring only a few extra buyers, so revenue per unit falls and profit drops.
• Competitors' reactions: if rivals match your cut, you keep the lower price but lose the extra customers you hoped for.
• Costs: selling more means buying more materials and paying for more staff hours, which eats into the gain.
• Brand image and loyalty: loyal customers may pay more without leaving, giving a price rise a good chance of raising profit.
• Target market segment: bargain hunters respond strongly to a discount, while customers buying for status may not.

When a lower price backfires

A lower price can damage a premium image. If a scented candle brand normally sells at £20 and suddenly drops to £12, shoppers may assume the ingredients are cheaper or the product is being cleared, and the customers who valued its exclusivity drift away. Rebuilding a luxury reputation is slow and expensive.

Judging it by profit

A candle maker sells 2,000 candles a month at £20, with £8 of costs per candle. Each sale leaves £12, so the business makes £24,000 a month before fixed costs such as rent. Cutting the price to £16 leaves only £8 per candle, so it must sell 3,000 candles just to make the same £24,000. That is 50% more sales simply to stand still, before any extra staff or storage costs.

A pricing strategy works when the gains from extra sales or a higher price outweigh what the business gives up, so these factors have to be weighed against each other rather than judged one at a time.