A price approach is the method a business uses to decide what to charge, such as adding a markup to cost, matching rivals, or starting low to win customers. In a case, you compare the approaches using the figures given, then recommend one and say what could change the result.
Check your Cambridge syllabus page for the pricing terms your course names, because Business Studies 0450 and Business 0264 may word them differently. The reasoning below works under either. This lesson sits in marketing choices and follows explaining a positioning choice.
How do you compare price approaches?
Work through three questions for each approach. What price does it give, and what profit per unit follows? Does it suit the customers and rivals in the case?
Then compare total profit at each price using the sales volumes the case supplies. Volumes at different prices are estimates, so say so.
Worked example
Lanai Snacks is a new keropok brand in Kuching. Each pack costs RM3.20 to make. A rival sells a similar pack at RM5.50. The owner is considering three prices:
- Cost-plus with a 50% markup.
- Competitor-based at the rival’s price of RM5.50.
- Penetration at RM3.90 for the first two months.
The owner estimates monthly sales of 1,000 packs at the cost-plus price, and 1,800 packs at RM3.90. No estimate is given for RM5.50.
Step 1, cost-plus price. The markup is 50% of RM3.20, which is RM1.60. The price is RM3.20 + RM1.60 = RM4.80.
Step 2, profit per pack at each price.
| Approach | Price | Cost | Profit per pack |
|---|---|---|---|
| Cost-plus | RM4.80 | RM3.20 | RM1.60 |
| Competitor-based | RM5.50 | RM3.20 | RM2.30 |
| Penetration | RM3.90 | RM3.20 | RM0.70 |
Step 3, total monthly profit where volumes are given. Cost-plus: RM1.60 × 1,000 = RM1,600. Penetration: RM0.70 × 1,800 = RM1,260.
Step 4, judge. At the estimated volumes, penetration earns RM340 less a month (RM1,600 − RM1,260 = RM340). It may still be worth it if the aim is to win first-time buyers who then return, but the case would need to show that. The competitor price earns the most per pack, yet a new, unknown brand at RM5.50 may struggle to sell.
A useful note for later: the 50% markup is on cost. As a share of the RM4.80 price, the profit is RM1.60 ÷ RM4.80 = 33.3%. The ratios tool shows why markup and margin are different numbers.
The mistake to watch for
A common slip is to assume a lower price always means more profit, or more sales means more profit.
Mistaken answer: “Penetration pricing is the right choice because 1,800 packs is more than 1,000 packs, so profit will be higher.”
The student compared packs sold and ignored the profit on each pack.
The correction is to multiply per-unit profit by volume at each price. RM1,260 is lower than RM1,600, so the extra volume did not make up for the lower price in this case. A balanced answer then says when penetration could still be sensible.
Check yourself
Write your working first, then open the answer.
1. A pack costs RM2.50 and the owner uses a 40% markup. Find the selling price.
Show answer
40% of RM2.50 = RM1.00. Price = RM2.50 + RM1.00 = RM3.50.
2. A pack costs RM3.20 and sells at RM4.00. The owner expects to sell 900 packs a month. Find the monthly profit.
Show answer
Profit per pack = RM4.00 − RM3.20 = RM0.80. Monthly profit = RM0.80 × 900 = RM720.
3. A company launches a new gadget with no close rival and sets a very high price at first, planning to lower it later. Which approach is this, and why might it work?
Show answer
This is skimming. It may work because early buyers who really want the gadget are willing to pay more, and there are no close rivals to undercut it. It can fail if customers find the price too high or rivals arrive quickly.
Where this leads next
Price works alongside how you reach customers. Next, link promotion to objective and audience. For the cash side of selling on credit, the cash versus profit bridge shows why profit and cash can differ.
Pricing questions mix arithmetic with judgement, and marks go to both. Our teachers can check each step with you in online one-to-one Business tuition.