What is penetration pricing?

Penetration pricing means setting a low price at launch to win customers and market share quickly.

When might a business use penetration pricing?

Penetration pricing suits a new entrant to a market with strong competitors, such as a new streaming service. The low price persuades customers to try it and switch.

What are the risks of penetration pricing?

The low price may not cover costs, so profit is low at first. Customers may leave when the price later rises.

OCR GCSE Business J204

Business Activity

Topic overview Enterprise and entrepreneurship Business planning and the business plan Sole traders, partnerships and limited companies Business aims and objectives Internal and external stakeholders Organic and external growth How business functions depend on each other

Marketing

Topic overview The purpose of marketing Primary and secondary market research Market segmentation Product design and the product life cycle Pricing methods Point of sale promotion and advertising Place and the marketing mix

People

Topic overview The role of human resources Organisational structures and ways of working Communication in business Recruitment and selection Employee motivation and retention Training and staff development Employment law

Operations

Topic overview Production processes Quality of goods and services The sales process and customer service Consumer law Business location Procurement and choosing suppliers Logistics and supply chains

Finance

Topic overview The role of the finance function Sources of finance Revenue, costs, profit and loss Break-even Cash, liquidity and profit Cash flow forecasts

Influences on Business

Topic overview Ethical and environmental considerations The economic climate Globalisation and multinational companies International branding and competition

Marketing

Pricing methods

3 things to know
Component 01

Overview

Price skimming, penetration, cost-plus, competitor and promotional pricing, when each suits, worked mark-up and discount calculations, and choosing a method for a new coffee shop.

What you need to know

Answer each one before you reveal it.

Your recallNot started

Key term

What is price skimming?

Key term

When is price skimming most suitable?

Evaluation

State one disadvantage of price skimming.

Questions from this subtopic

Each one with the model answer underneath.

1
What is price skimming?
Model answer
Price skimming means setting a high price when a product is launched, then lowering it over time.
2
When is price skimming most suitable?
Model answer
Price skimming suits new, innovative products with few competitors, such as the latest games console. Early buyers are willing to pay a premium to own it first.
3
State one disadvantage of price skimming.
Model answer
A high launch price can put off many customers and limit early sales.
4
What is penetration pricing?
Model answer
Penetration pricing means setting a low price at launch to win customers and market share quickly.
5
When might a business use penetration pricing?
Model answer
Penetration pricing suits a new entrant to a market with strong competitors, such as a new streaming service. The low price persuades customers to try it and switch.
6
What are the risks of penetration pricing?
Model answer
The low price may not cover costs, so profit is low at first. Customers may leave when the price later rises.

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Business Activity

Marketing

People

Operations

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Customers may receive quality.

poorerbetterhigher

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AOwners may gain from higher profit.

BEmployees may lose jobs or face lower pay.

CCustomers may receive poorer quality.

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Aim means a broad long-term goal of a business.

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