Is competitive pricing the best method for an established business to use?
CAMBRIDGE
O level and GCSE
Year Examined
May/June 2022
Topic
Pricing
👑Complete Model Essay
Do you think competitive pricing is the best method for an established business to use?
Competitive pricing is a strategy where a business sets its prices similar to or lower than those of its rivals. While it can be an effective method for attracting customers, it is not always the best approach for an established business. This essay will argue that while competitive pricing can be beneficial, factors like brand strength and cost management should be considered to determine its suitability.
Benefits of Competitive Pricing
One significant advantage of competitive pricing is its ability to attract price-sensitive customers. For instance, imagine two supermarkets selling the same brand of orange juice. If Supermarket A offers it for £1.50 while Supermarket B charges £1.70, many customers would opt for the lower price at Supermarket A. This illustrates how competitive pricing can lead to higher sales volume.
Furthermore, this strategy can help an established business protect its market share. The airline industry exemplifies this point. If a well-established airline like British Airways faces competition from a budget airline offering cheaper flights, British Airways might need to adjust its prices to avoid losing customers to the cheaper alternative. This shows how competitive pricing can be crucial for retaining customers in a competitive market.
Limitations of Competitive Pricing
However, solely focusing on competitive pricing can have drawbacks. One significant issue is the potential impact on profitability. Imagine a bakery famous for its artisan bread. If it lowers its prices to match a new bakery offering standard bread at lower prices, it risks reducing its profit margin. This is especially problematic if the established bakery uses higher-quality ingredients, as its costs are likely higher.
Moreover, businesses need to consider their brand image and value proposition. A luxury car manufacturer like BMW would lose its premium image if it drastically lowered prices to compete with budget car brands. Customers associate BMW with high quality and exclusivity, and competitive pricing could damage this perception. In such cases, alternative pricing strategies focusing on value rather than just price might be more effective.
Conclusion
In conclusion, while competitive pricing can benefit established businesses by attracting customers and defending market share, it is not always the optimal solution. Businesses must weigh the advantages against potential disadvantages, such as reduced profitability and potential damage to brand image. Ultimately, a balanced approach that considers competitor pricing, cost structure, brand value, and target market is essential for an effective pricing strategy.
**Source:**GCSE Business Studies textbook. (Please refer to the specific textbook you are using for complete citation information.)
Is competitive pricing the best method for an established business to use?
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Do you think competitive pricing is the best method for an established business to use?
Competitive pricing is a strategy where a business sets its prices similar to or lower than those of its rivals. While it can be an effective method for attracting customers, it is not always the best approach for an established business. This essay will argue that while competitive pricing can be beneficial, factors like brand strength and cost management should be considered to determine its suitability.
Benefits of Competitive Pricing
One significant advantage of competitive pricing is its ability to attract price-sensitive customers. For instance, imagine two supermarkets selling the same brand of orange juice. If Supermarket A offers it for £1.50 while Supermarket B charges £1.70, many customers would opt for the lower price at Supermarket A. This illustrates how competitive pricing can lead to higher sales volume.
Furthermore, this strategy can help an established business protect its market share. The airline industry exemplifies this point. If a well-established airline like British Airways faces competition from a budget airline offering cheaper flights, British Airways might need to adjust its prices to avoid losing customers to the cheaper alternative. This shows how competitive pricing can be crucial for retaining customers in a competitive market.
Limitations of Competitive Pricing
However, solely focusing on competitive pricing can have drawbacks. One significant issue is the potential impact on profitability. Imagine a bakery famous for its artisan bread. If it lowers its prices to match a new bakery offering standard bread at lower prices, it risks reducing its profit margin. This is especially problematic if the established bakery uses higher-quality ingredients, as its costs are likely higher.
Moreover, businesses need to consider their brand image and value proposition. A luxury car manufacturer like BMW would lose its premium image if it drastically lowered prices to compete with budget car brands. Customers associate BMW with high quality and exclusivity, and competitive pricing could damage this perception. In such cases, alternative pricing strategies focusing on value rather than just price might be more effective.
Conclusion
In conclusion, while competitive pricing can benefit established businesses by attracting customers and defending market share, it is not always the optimal solution. Businesses must weigh the advantages against potential disadvantages, such as reduced profitability and potential damage to brand image. Ultimately, a balanced approach that considers competitor pricing, cost structure, brand value, and target market is essential for an effective pricing strategy.
**Source:**GCSE Business Studies textbook. (Please refer to the specific textbook you are using for complete citation information.)
Extracts from Mark Schemes
Question: Do you think competitive pricing is the best method for an established business to use? Justify your answer.
Identification of relevant points:
1. Price will not discourage customers from buying.
2. Prevents business from losing market share which could result in less revenue.
Development of points:
1. Competitive pricing ensures that customers are not deterred by high prices, thereby maintaining customer loyalty.
2. By staying competitive in pricing, the business can prevent losing market share to competitors, leading to a decline in revenue.
Justified decision:
Competitive pricing may not always be the best method for an established business to use. While it is essential to consider competitors' prices, solely basing pricing decisions on competition may lead to challenges such as not covering costs adequately, making it difficult for the business to break even. However, an established business with a good reputation may have the flexibility to explore other pricing methods that allow for higher pricing, especially if customers are willing to pay more for a popular brand. Therefore, the decision on whether competitive pricing is the best method depends on the specific circumstances of the business and its market position.