Edexcel GCSE Business: Product and price decisions (1BS0) – Revision Notes

These notes condense Pearson Edexcel Level 1/Level 2 GCSE (9-1) Business (1BS0), Issue 2, July 2022, Theme 2: Building a business, topic 2.2 Making marketing decisions, content items 2.2.1 Product and 2.2.2 Price. For full explanations and worked examples, read the study guide. When you are ready to test yourself, use the practice questions.

Links: the Edexcel GCSE Business hub, the printable checklist and the free diagnostics. Related: the marketing mix and the business plan.

The specification sets two written papers, Theme 1 (1BS0/01) and Theme 2 (1BS0/02), each 1 hour 45 minutes, 90 marks and 50% of the qualification. Calculators may be used. Formulae are listed in the specification (Appendix 3) and are not provided in the examinations, so learn the ones below.

1. The design mix (2.2.1)

Part	Meaning	Link to cost and price
Function	What the product does and how well: reliability, ease of use, durability	Better function usually costs more to build
Aesthetics	How it looks, feels, sounds, smells or tastes; includes packaging	Finish and styling add cost but can support a higher price
Cost	What it costs the business to make or provide	Limits the other two; sets the minimum price that leaves a profit

Design is a trade-off. Improving one part often raises cost, which affects price, demand and profit.

Worked reminder: cost against design

A bag costs £2.10 for materials, £0.90 for labour and £0.50 for packaging, so the unit cost is £3.50. A leather trim would add £1.20 a unit. The new unit cost is £4.70, a rise of 1.20 ÷ 3.50 × 100 = 34.3%. The trim only pays off if the higher price, or the extra sales, covers that extra £1.20 on every unit sold.

2. Differentiation (2.2.1)

Differentiation means making a product or service different from rivals’ in a way customers notice and value.

Benefit to the business	Limit
A reason to choose it over rivals	Costs money to create
Can support a higher price	Can be copied
Builds loyalty	Worthless if customers do not value the difference

Method in steps: answering “explain the importance of differentiation”

1. Define it in a clause.
2. Give one benefit (sales, price or loyalty).
3. Expand with a consequence for revenue or profit.
4. Where a business is named, tie the difference to its customers.

3. The product life cycle (2.2.1)

The specification refers to “the phases” without listing them. The standard four are below.

Phase	Sales	Profit	Typical response
Introduction	Low, slow rise	Low or negative	Build awareness, encourage trial
Growth	Rapid rise	Rising	Build share, watch new rivals
Maturity	Peak, flat	Often highest, under pressure	Defend share, differentiate
Decline	Falling	Falling	Extend or withdraw

Percentage change = (new value − original value) ÷ original value × 100. This is the standard form.

Extension strategies

Method	Example in words
Modify the product	New flavour, redesign, extra feature
New market	New segment or new country
New use	Promote for a different purpose
Packaging, price, promotion or place	Fresh packaging, a deal, a new sales channel

Judge an extension by the extra sales it brings against what it costs. Contribution per unit = selling price − variable cost (standard form, not an Appendix 3 formula).

Worked reminder: is an extension worth it?

A product sells at £25 with a variable cost of £14, so contribution is £11 a unit. A relaunch costs £6,000. It pays for itself only if it adds more than 6,000 ÷ 11 = 545.45 units, so at least 546 extra units (546 × 11 = £6,006).

4. Pricing strategies (2.2.2)

The specification names “pricing strategies” without listing them. These are the standard ones.

Strategy	Meaning	Suits	Risk
Penetration	Low launch price to gain share	New product, many rivals, price-sensitive buyers	Low profit per unit; hard to raise price later
Skimming	High launch price, cut later	Novel product, few rivals	Few buyers at first; rivals may enter
Competitive	Price close to rivals	Similar products, buyers who compare	Little scope to stand out on price
Cost-plus	Unit cost + mark-up	Simple, set profit per unit	Ignores demand and rivals
Psychological	Looks lower, e.g. £7.99	Everyday goods	Gain depends on customer perception
Promotional	Temporary price cut	Clearing stock, first purchase	Customers may wait for deals

Cost-plus in standard form: selling price = unit cost + (unit cost × mark-up %). Revenue = price × quantity. Total cost = TFC + TVC (Appendix 3).

Worked reminder: revenue against contribution

A business can launch a product at £60 and sell 400, or at £45 and sell 600. The unit variable cost is £30.

• Revenue at £60: 60 × 400 = £24,000. At £45: 45 × 600 = £27,000.
• Contribution at £60: (60 − 30) × 400 = £12,000. At £45: (45 − 30) × 600 = £9,000.

The lower price earns more revenue but less contribution. Always say which measure you are using.

5. Influences on pricing strategies (2.2.2)

Influence	Effect on pricing
Technology	Easy online price comparison pushes prices towards rivals’; automation and online selling can cut costs; prices are easy to change
Competition	More close rivals means less freedom; a differentiated product with few rivals has more
Market segments	Groups may pay different prices, so prices can be set for each
Product life cycle	Skimming or penetration suit introduction; competitive pricing suits growth and maturity; promotional pricing may clear stock in decline

Method in steps: recommending a pricing strategy

1. Identify the product’s phase and the target segment from the information given.
2. Say how many rivals there are and how close their products are.
3. Choose a strategy that fits those facts and name it.
4. Support it with a figure if one is given, such as revenue, contribution or percentage change.
5. Give the main drawback and say whether it changes your choice.
6. For “evaluate” or “justify”, end with a clear judgement and the reason for it.

Method in steps: reading life cycle data

1. Work out the percentage change between each pair of periods.
2. Large rises mean growth; small changes near the peak mean maturity; repeated falls mean decline.
3. Name the phase and quote at least one figure.
4. Say what the business should do next, for example extend the product.

6. Must-know distinctions

• Penetration is a low launch price; skimming is a high launch price.
• Differentiation is the difference; extension is the action to lengthen a product’s life.
• Revenue is price × quantity; profit is revenue minus total cost; contribution is price minus variable cost per unit.
• Maturity has flat sales at the peak; decline has falling sales.
• Cost-plus starts from cost; competitive pricing starts from rivals’ prices.

Quick self-test

1. Define “differentiation”.
2. State the three parts of the design mix.
3. Sales rise from 2,000 to 2,600 units. Calculate the percentage change.
4. Sales fall from 5,000 to 3,800 units. Calculate the percentage change.
5. A product has flat sales at their peak and many rivals. Which phase is it in?
6. A unit costs £4.50 and the mark-up is 40%. Calculate the cost-plus price.
7. A business sells 1,300 units at £8.50, with fixed costs of £4,200 and a variable cost of £3.10 a unit. Calculate the profit.
8. Give two extension strategies.
9. Which strategy sets a high launch price and lowers it later?
10. Explain one way competition can influence a pricing strategy.

Answers

1. Making a product or service different from rivals’ in a way customers notice and value.
2. Function, aesthetics and cost.
3. (2,600 − 2,000) ÷ 2,000 × 100 = +30%.
4. (3,800 − 5,000) ÷ 5,000 × 100 = −24%.
5. Maturity.
6. Mark-up 4.50 × 0.40 = £1.80; price 4.50 + 1.80 = £6.30.
7. Revenue 8.50 × 1,300 = £11,050. Variable costs 3.10 × 1,300 = £4,030. Total cost 4,200 + 4,030 = £8,230. Profit = £2,820.
8. Any two of: modify the product, find a new market, find a new use, change packaging, price, promotion or place.
9. Price skimming.
10. With many close rivals, a business has little freedom to charge more, because customers can switch. It may therefore use competitive or penetration pricing, which keeps sales but limits profit per unit.

Where marks are usually lost

• Naming a pricing strategy without saying what it is or why it suits this product.
• Listing life cycle phases without using the data in the question.
• Giving an extension strategy with no link to the cost, the market or the product.
• Writing “differentiation makes the product better” instead of “different in a way customers value”.
• Mixing up penetration and skimming.
• Calculating percentage change by dividing by the new value instead of the original.
• Confusing revenue, contribution and profit.
• Giving a one-sided answer to an evaluation question, with no judgement.
• Leaving out units or the pound sign in calculations.

Frequently asked questions

What is the design mix in Edexcel GCSE Business? The design mix is the set of decisions a business makes when designing a product. The 1BS0 specification names three parts: function, aesthetics and cost, which pull against each other so design is a trade-off.

What are the four phases of the product life cycle? The standard four phases are introduction, growth, maturity and decline. The specification refers to “the phases” without listing them, so these are the standard names.

What is the difference between penetration pricing and price skimming? Penetration pricing sets a low price at launch to win customers and market share quickly. Price skimming sets a high price at launch for a new or unusual product with few rivals, then lowers it later.

How do you calculate contribution per unit? Contribution per unit is the selling price minus the variable cost per unit. It is the standard measure for judging an extension strategy, and it is not one of the Appendix 3 formulae.

Official syllabus

Pearson Edexcel Level 1/Level 2 GCSE (9-1) in Business (1BS0), Specification, Issue 2, July 2022, published by Pearson Education Limited. Theme 2: Building a business, topic 2.2 Making marketing decisions, content items 2.2.1 Product and 2.2.2 Price.