Select a pricing method
Compare cost-plus, competitive, penetration, skimming and dynamic pricing in context.
Section 3 · Marketing
Cambridge IGCSE (9–1) Business 0774, 2027–2029 Version 2, Topic 3. Apply each marketing choice to the stated customers, product and business constraints. Written practice is self-checked and does not certify exam readiness
Before you begin
- No previous marketing study is assumed. Identify the customer group, the business objective and the evidence in each situation before choosing a response.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
Which method begins with unit cost and adds a mark-up?
What you will learn
- Recognise five pricing methods
- Explain their possible benefits and drawbacks
- Recommend a method using demand and cost evidence
Different methods start from different reference points
Cost-plus pricing adds a percentage or amount to cost. Competitive pricing considers rivals' prices. Penetration pricing sets a low initial price to attract customers or gain market share; skimming sets a high initial price for a new offer before it may be reduced.
Dynamic pricing changes prices in response to conditions such as demand or available capacity. Its use requires suitable information and can be difficult to explain to customers.
No method removes market uncertainty
Cost-plus can help cover costs but may ignore what customers will pay. Competitive pricing can position an offer relative to rivals but does not prove those prices are profitable. Penetration can build trial but reduce early contribution; skimming can earn more from customers willing to pay but may limit initial sales.
Recommend a method by considering the product, costs, demand, competitors and objectives. A price decision can affect sales and profit differently.
Pause and explain
What is one possible risk of penetration pricing?
Worked example
A new phone accessory has low unit cost, several close rivals and a price-sensitive target market. Which pricing method could support trial, and what should the business check?
Show the worked solution
- A lower introductory price can encourage trial.
- Penetration pricing may help attract customers.
- Check whether contribution covers costs and whether customers stay after the offer.
Answer Penetration pricing may attract price-sensitive customers and trial. The business should check contribution, capacity and repeat demand before relying on the introductory price.
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
A new reusable bottle has a strong design but unknown demand. Compare penetration and skimming pricing for its launch.
Give me a hint
Consider customer willingness to pay, trial and the need to recover costs.
Compare my reasoning
- Penetration starts lower to encourage trial or share.
- Skimming starts higher for customers willing to pay more.
- Unknown demand means each approach should be tested against costs and customer response.
Penetration may encourage trial and build share but gives lower initial revenue per sale. Skimming may earn more from early buyers but limit volume. The business should test willingness to pay and ensure the chosen price supports its costs and objective.
Look for these in your work
- Both methods correctly distinguished
- Trade-offs explained
- Demand and costs applied
A retailer uses cost-plus pricing but sales are weak despite a lower price than competitors. Explain two factors beyond cost that it should investigate.
Give me a hint
A price derived from cost does not establish customer value or product fit.
Compare my reasoning
- Customers may prefer competitors' features or service.
- The target segment may not value the product.
- Availability or promotion may also affect sales.
The retailer should investigate whether customers value the product's features and whether it reaches the right segment. It should also check availability and promotion: cost-plus pricing alone does not create demand.
Look for these in your work
- Two demand-side factors
- Cost-plus limitation
- Other marketing factors considered
An airline changes ticket prices frequently with remaining seats and booking time. Identify the method and one benefit and customer concern.
Give me a hint
The price moves in response to changing conditions.
Compare my reasoning
- This is dynamic pricing.
- It may help adjust demand and available capacity.
- Customers may find price variation confusing or unfair.
This is dynamic pricing. It may help match prices to demand and remaining capacity, but customers may consider frequent differences confusing or unfair unless the business communicates its policy clearly.
Look for these in your work
- Method identified
- Business benefit stated
- Customer concern included
Common mistakes
- Assuming cost-plus guarantees sales
- Confusing penetration pricing with skimming
- Changing dynamic prices without considering customer trust
What can you explain now?
Which method begins with unit cost and adds a mark-up?
Compare with the explanation
Cost-plus pricing
The method sets price from cost plus a chosen amount or percentage.
After trying it yourself, choose your next review. This is your self-assessment.
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Make it stick
How do penetration and skimming pricing differ at product launch?
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.