Topic 2.5 · Price
Price: Strategies, Pricing Power and the Law
Value-based, competitive, cost-based and penetration pricing; what determines pricing power, including price elasticity; and pricing practices that are illegal.
25 min read Reviewed
Learning objectives
- 2.5.ADevelop and evaluate a pricing strategy.
- 2.5.BEvaluate how market conditions affect a business’s pricing power.
- 2.5.CDescribe legal constraints that limit pricing power.
Objective statements © College Board, quoted from the Course and Exam Description.
Price drives both customer behavior and revenue and profit, so setting it well is critical to viability. Whatever the strategy, a business must remember one rule:
If price is at or below per-unit cost, the product is not profitable, though a business may accept this temporarily (see penetration pricing).
Four pricing strategies
| Strategy | How the price is set | Who tends to use it |
|---|---|---|
| Value-based | Customers' perceived value | Highly differentiated or uniquely valuable products |
| Competitive | Rivals' prices: match, charge a if differentiated, or go to gain share |
Key terms
- Per-unit cost
- The cost of producing and distributing one unit. A price at or below it is not profitable.
- Value-based pricing
- Setting price based on the product's perceived value to customers. Common for highly differentiated products.
- Competitive pricing
- Setting price relative to rivals' prices (price matching, a premium, or a lower price).
- Cost-based pricing
- Setting price to achieve a desired per-unit profit over per-unit cost.
- Penetration pricing
- A deliberately low initial price, possibly below cost, to win price-sensitive customers and grow share quickly, with plans to raise it later.
- Pricing power
- The ability to raise prices without losing significant market share.
- Price elasticity of demand
- How responsive customers' purchases are to price changes. Elastic = very responsive; inelastic = not very responsive.
- Price collusion
- Competitors agreeing on prices, usually to keep them above the competitive level. Illegal in the U.S. and many countries.
- Price gouging
- Raising prices on goods in high demand because of a crisis. Illegal in many U.S. states.
- Price discrimination
- Charging different prices to different segments for the same product. Illegal when based on race, nationality, sex or another protected status.
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