# Pricing Strategies

Business I · Economics of the Firm · https://tryals.app/learn/business-i/pricing-strategies

## Pricing Foundations

Pricing is where strategy meets arithmetic. **Cost-plus** starts from unit cost and adds a markup: $p = c \cdot (1 + m)$. It feels safe, but ignores willingness to pay and competition.

| Strategy | Anchors on | Best when |
| --- | --- | --- |
| **Cost-plus** | Unit cost | Stable costs, low information |
| **Value-based** | Perceived value | Value is high and demonstrable |
| **Penetration** | Low launch price | Mass market, scale economies |

**Value-based pricing** anchors on what customers willingly pay, pricing downward from that value. A software tool saving 10,000 euros yearly can price high despite pennies in delivery cost.

**Penetration pricing** launches low to win fast adoption through volume and network effects, fitting price-sensitive mass markets with scale economies.

> **Common pitfall:** Cost-plus guarantees a margin on paper, but if the final price exceeds customer willingness to pay, that margin applies to zero sales.

## Advanced Strategies

| Strategy | Anchors on | Best when |
| --- | --- | --- |
| **Skimming** | High launch price | Novelty, patent, prestige |
| **Discrimination** | Willingness to pay | Segments separable, no resale |

**Skimming** launches high to harvest eager early adopters, then steps prices down for subsequent layers. Think of successive phone generations with strong patent or prestige protection.

**Price discrimination** charges different prices for the same product when segments differ and resale is prevented. Examples include student tickets or business class. It turns consumer surplus into revenue.

**Optimal pricing** balances margin against volume. Raising price gains margin on kept customers but loses marginal buyers. The sweet spot depends on **price elasticity**: how sharply demand reacts. High elasticity punishes high prices, while low elasticity forgives them.

## Practice questions

8 of this lesson's 14 practice questions, with answers. The full set is in the app.

### 1. Penetration pricing aims to maximize profit on each unit sold from day one.

**Answer:** False

**Why:** Penetration deliberately sacrifices early margin to buy adoption, scale, and habit, profit per unit comes later, once the base is won.

Page: https://tryals.app/practice/business-i/pricing-strategies/penetration-pricing-aims-to-maximize-profit-on-each-unit-sold-from

### 2. A product costs 60€ to make and sells with a 25% markup on cost. Set the slider to its price in €.

**Answer:** 75 (within ±1.5)

**Why:** $p = 60 \cdot 1.25 = 75$€. Note the asymmetry: a 25% markup on cost is only a 20% margin on price, a classic interview trap.

Page: https://tryals.app/practice/business-i/pricing-strategies/a-product-costs-60-to-make-and-sells-with-a-25-markup-on-cost-set

### 3. Sort each real-world price into its strategy.

**Answer:**

- Skimming: New console launches at 599€, drops to 399€ in year two
- Penetration: Streaming service offers 1€ for the first three months
- Price discrimination: Museum charges students half price, Airline sells the same seat cheaper five weeks early

**Why:** Skimming steps down through buyer layers over time; penetration buys adoption with low launch prices; discrimination charges segments differently at the same moment.

Page: https://tryals.app/practice/business-i/pricing-strategies/sort-each-real-world-price-into-its-strategy

### 4. Match each pricing method to the condition where it shines.

**Answer:**

- Skimming → Novel product, patent protection, eager early adopters
- Penetration → Mass market with scale economies and price-sensitive buyers
- Value-based → Product saves the customer a measurable amount
- Cost-plus → Stable costs and little competitive information

**Why:** No strategy is universally best, each matches a market structure and information environment.

Page: https://tryals.app/practice/business-i/pricing-strategies/match-each-pricing-method-to-the-condition-where-it-shines

### 5. Why can a cinema profitably charge students less than adults for the same seat?

A. Students will pay less and cannot resell
B. Student tickets cost the cinema less to provide
C. Adults prefer paying more for identical service
D. The law requires discounts for students

**Answer:** A. Students will pay less and cannot resell

**Why:** Discrimination works when segments differ in willingness to pay *and* arbitrage between them is blocked (the student ID). The seat costs the cinema the same either way.

Page: https://tryals.app/practice/business-i/pricing-strategies/why-can-a-cinema-profitably-charge-students-less-than-adults-for-the

### 6. A software firm charges 9€ a month for individuals and 90€ per seat for enterprises, shipping identical code. What makes that sustainable rather than a scandal?

A. The segments cannot arbitrage between the two prices
B. Enterprises value the product more, which morally justifies the higher price
C. The enterprise version costs far more to develop and support
D. It is not sustainable; competition will collapse the two prices into one

**Answer:** A. The segments cannot arbitrage between the two prices

**Why:** Discrimination survives only where resale is blocked, which is why the terms of service do the economic work the code does not. Cinemas check student cards for the same reason, and airlines invent Saturday-night stays, each is a fence keeping one segment out of the other's price.

Page: https://tryals.app/practice/business-i/pricing-strategies/a-software-firm-charges-9-a-month-for-individuals-and-90-per-seat

### 7. Which are genuine weaknesses of pure cost-plus pricing?

A. It can price you out of the market when costs are high
B. It requires knowing the product’s cost
C. It ignores competitors’ prices
D. It ignores customers’ willingness to pay

**Answer:** A. It can price you out of the market when costs are high; C. It ignores competitors’ prices; D. It ignores customers’ willingness to pay

**Why:** Knowing your cost is a feature, not a flaw. The blindness to demand and competition, and the death spiral when high costs force high prices, are the real weaknesses.

Page: https://tryals.app/practice/business-i/pricing-strategies/which-are-genuine-weaknesses-of-pure-cost-plus-pricing

### 8. Versioning sells a cut-down product alongside a full one, sometimes by disabling features already built. Why can deliberately degrading a product raise profit?

A. Because the cheap tier must be worse enough to deter switching
B. Because customers value having a choice regardless of what is offered
C. Because competition law requires firms to offer an entry-level option
D. Because the cut-down version is genuinely cheaper to produce

**Answer:** A. Because the cheap tier must be worse enough to deter switching

**Why:** The degradation is a price-discrimination device. If the gap between tiers is too small the premium buyers trade down, and the firm captures less than with a single price, which is why the cheap tier is made worse on purpose.

Page: https://tryals.app/practice/business-i/pricing-strategies/versioning-sells-a-cut-down-product-alongside-a-full-one-sometimes