IB Business & Management
IB2 Higher Level
What is price penetration?
What is price skimming?
What is price leadership?
What is cost plus pricing?
What is a variable cost?
What is a fixed cost?
By the end of the lesson, students should be
able to: -
Understand the difference between cost based
pricing, competition based pricing and market
Identify the different pricing strategies available to
The marginal cost is the addition to the total cost
for producing one extra unit of output.
Some businesses have very high fixed costs and
very low variable costs, so when their fixed costs
have been recovered, they can sell at any price
above the variable.
Any extra units sold will only add a small amount
to their total costs.
Examples are utility companies
It is important not to publicise this low price
This is similar to marginal-cost pricing in that it mainly considers
the variable costs of production.
Businesses will want to make sure that their variable costs, such
as raw materials, are covered but also need a contribution
towards the fixed costs of the business, such as rent.
Fixed cost= $400 and variable costs = $6 per unit, $600 for 100
The business prices the product at $11. This gives a contribution
to fixed costs of $5
$5 = 80
The fixed costs will be covered by the first 80 sold, any more sold
beyond that will add $5 profit.
This method is often used for large orders.
This method is deliberately selling a product
below average cost with the intention of
forcing a competitor out of the market.
In many countries this is illegal, but it is very
hard to prove.
In France in 2004 Amazon was convicted of
predatory pricing by offering free delivery on
books. Amazon did not change its policy but
simply kept paying the $1000 a day fine.
This is where the business price their products at
whatever the prevailing market price may be.
This is likely to be if the market is highly transparent,
the business would lose most of its sales if they
charged a higher price.
They would not want to charge a lower price as it
will earn a lower profit per unit and may even start a
Agricultural markets are a good example of this.
Most markets can be broken down into
different sub-groups. It is likely that
customers in these groups may be prepared
to pay slightly higher prices that those in
Examples include phone calls, it is more
expensive to call during the day than in the
evening and weekend. WHY???
Loss leaders are products sold at very low prices to
tempt customers into a store.
Most supermarkets offer a low-cost range, which in
itself may not be profitable. The supermarket knows
though that someone coming is unlikely to only buy
products in the low cost range.
A business can use loss leading products in its
Walmart offer new CD albums at half the RRP.
The price gives the customer information
about the product. You would expect a luxury
product to be priced at the higher end of the
market. Pricing too cheaply may perceive a
lack of quality.
Psychological pricing also refers to setting
the price just under the currency unit
Special offer pricing is used to clear excess
stock or to try and gain market share
Task: Price Wars
The world’s largest supermarket chains (such as Wal-Mart,
Carrefore and Tesco) have huge market power to reduce
prices. Price reductions are a key technique used by
supermarkets. E.g. the UK consumer has gown accustomed to
supermarket price wars, with over a £1billion of price
reductions each year. Price wars are also increasingly common
in the airline and mobile phone industries.
1. Describe what is meant by a price war [2 marks]
2. Examine the winners and losers of a price war in the short run
and the long run. [6 marks]
3. Justify two forms of non-price competition that supermarkets
might use to increase their competitiveness
Task 2: Sony PlayStation 3
Sony launched the PlayStation 3 in late 2006. It was quick to
win positive reviews, although analysts questioned the price
which was set over $100 more than the Xbox 360 from
Microsoft, its main rival. Sony said its state of the art console
with a built in Blu-ray DVD player made the premium price
value for money.
Despite higher prices charged by Sony, the Japanese
manufacturers loses money on each console sold. It makes up
for this when customers buy several games and other software
products during the PS3’s product life-cycle.
1. Define the term premium price [2 marks]
2. In the context of the case study, examine the relationship
between a product’s cash flow position and its life cycle. [8
Task 3: Virgin Blue
Virgin Blue is the creation of Richard Branson, founder CEO of
the Virgin Group. The airline carrier was launched in 2000 by
Sir Richard Branson and Virgin Blue CEO Brett Godfrey, to
enter the Australian market. Initially set up as a low fare carrier,
the company only flew between Brisbane and Sydney. Since
then it has become Australia’s second largest airline, catering
for all major cities in Australia. Customers pay for their in flight
meals and drinks. To cut further costs, Virgin Blue uses a
system of e-ticketing.
1. Describe three potential pricing strategies that airline
companies can adopt when entering a new market. [6 marks]
2. Evaluate two possible pricing strategies that airline carriers
such as Virgin Blue could use to increase their sales revenue.