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

This guide follows the Pearson Edexcel Level 1/Level 2 GCSE (9-1) in Business (1BS0) specification, Issue 2, July 2022. It covers Theme 2: Building a business, topic 2.2 Making marketing decisions, content items 2.2.1 Product and 2.2.2 Price. The specification has 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.

Links: the Edexcel GCSE Business hub, the printable checklist and the free diagnostics. Companion pages: the revision notes and the practice questions. Related: the marketing mix and the business plan and revenue, costs and profit. Every business and figure below is invented.

What the specification asks for

Item	What you need to learn	Where in this guide
2.2.1	The design mix: function, aesthetics, cost	Section 1
2.2.1	The importance to a business of differentiating a product or service	Section 2
2.2.1	The product life cycle: the phases	Section 3
2.2.1	The product life cycle: extension strategies	Section 4
2.2.2	Pricing strategies	Section 5
2.2.2	Influences on pricing strategies: technology, competition, market segments, product life cycle	Section 6

The specification gives the phases of the product life cycle and the pricing strategies as headings only, without listing them. This guide uses the standard four phases and the standard pricing strategies, and says so where it does.

1. The design mix (2.2.1)

The design mix is the set of decisions a business makes when it designs a product. The specification names three parts: function, aesthetics and cost. A good design balances all three for the target market.

• Function: what the product does and how well it does it, including reliability, ease of use and durability. A product that fails at its main job will not sell however attractive it is.
• Aesthetics: how the product looks, feels, sounds, smells or tastes. Colour, shape, finish and packaging all matter, and for some products they may decide the purchase.
• Cost: what it costs the business to make or provide the product. Cost limits the other two parts. Better materials improve function and appearance but raise the cost per unit, which then pushes up the price or cuts the profit.

The three parts pull against each other, so design is a trade-off.

Worked example 1: balancing the design mix

Kestrow Bottles makes drinks bottles. Design A is a plain steel bottle. Design B is insulated, with a coloured finish. Fixed costs are £3,000 a month.

	Design A	Design B
Unit variable cost (£)	5.20	7.40
Selling price (£)	12.00	16.00
Expected sales (units a month)	900	650

Using revenue = price × quantity and total cost = total fixed costs + total variable costs (both in Appendix 3):

• Design A: revenue 12 × 900 = £10,800. Variable costs 5.20 × 900 = £4,680. Total cost 3,000 + 4,680 = £7,680. Profit = £3,120.
• Design B: revenue 16 × 650 = £10,400. Variable costs 7.40 × 650 = £4,810. Total cost 3,000 + 4,810 = £7,810. Profit = £2,590.

Design B has better function (it keeps drinks cold) and aesthetics, but its higher cost and price reduce expected sales, so profit is £530 lower. Design B could still be the better choice if the finish builds a brand. A strong answer uses the numbers, then weighs non-financial points.

2. Differentiating a product or service (2.2.1)

Differentiation means making a product or service different from rivals’ in a way customers notice and value, such as a feature, design, quality, service, convenience or brand image.

Why it matters to a business:

• It gives customers a reason to choose this business, so it can win sales without having the lowest price.
• It can support a higher price, because customers pay more for what they see as better or unique.
• It can build loyalty, since customers who value it are less likely to switch.

Limits to bear in mind:

• Differentiating costs money, through research, design or better materials.
• Rivals can copy a feature.
• A difference that nobody values adds cost without adding sales.

Kestrow’s insulated bottle is differentiated by a feature, but only if its target market values it enough to pay the higher price.

3. The product life cycle (2.2.1)

The product life cycle shows the stages a product passes through from launch until it leaves the market, tracked by sales over time. The specification refers to “the phases” without listing them. The standard four are introduction, growth, maturity and decline.

Phase	Sales	Profit and costs	Typical business focus
Introduction	Low and slowly rising	Heavy spending on development and promotion; profit low or negative	Make customers aware; get the product trialled
Growth	Rising fast	Profit rises as sales spread the fixed costs; rivals start to enter	Build market share; keep quality up
Maturity	Levels off at or near the peak	Profit usually at its highest, but competition is strong	Defend share; look for ways to stay ahead
Decline	Falls	Profit falls; costs may exceed revenue	Decide whether to extend the product or withdraw it

Worked example 2: identifying the phase

Veradyne Audio sells a wireless speaker. Annual sales in units were:

Year	1	2	3	4	5	6	7	8
Units sold	400	1,500	4,200	6,800	7,000	6,900	5,100	3,000

Percentage change = change ÷ original × 100. This is the standard form, and percentage change is one of the quantitative skills in Appendix 2.

• Year 2: (1,500 − 400) ÷ 400 × 100 = +275.0%.
• Year 3: (4,200 − 1,500) ÷ 1,500 × 100 = +180.0%.
• Year 4: (6,800 − 4,200) ÷ 4,200 × 100 = +61.9%.
• Year 5: (7,000 − 6,800) ÷ 6,800 × 100 = +2.9%.
• Year 6: (6,900 − 7,000) ÷ 7,000 × 100 = −1.4%.
• Year 7: (5,100 − 6,900) ÷ 6,900 × 100 = −26.1%.
• Year 8: (3,000 − 5,100) ÷ 5,100 × 100 = −41.2%.

Year 1 is introduction, years 2 to 4 growth (large rises), years 5 and 6 maturity (sales flat), and years 7 and 8 decline (sharp falls). The boundaries are a judgement, so quote the figures.

4. Extension strategies (2.2.1)

An extension strategy is an action that keeps a product’s sales up and lengthens its life, usually as sales begin to fall. Common methods:

• Modify the product: new features, a redesign, or new colours and flavours.
• Find a new market: sell to a new segment or to a new area, including overseas.
• Find a new use: promote the product for a different purpose.
• Change the packaging, the price or the promotion, or open a new place to sell.

An extension strategy costs money, so check that the extra sales justify it.

Worked example 3: is an extension worth it?

In year 7 Veradyne Audio sells its speaker at £40, with a variable cost of £24. Without action, the owner expects sales to fall to 3,000 units. An extension (new colours and a launch into a new market) costs £15,000 and is expected to hold sales at 5,100 units.

Contribution per unit = selling price − variable cost = 40 − 24 = £16. Contribution is the standard measure here, and it is not one of the Appendix 3 formulae.

• Extra units: 5,100 − 3,000 = 2,100.
• Extra contribution: 2,100 × 16 = £33,600.
• Net gain: 33,600 − 15,000 = £18,600.

The extension looks worthwhile on these figures. A balanced answer adds that the 5,100 is a forecast, so the real gain could be lower.

5. Pricing strategies (2.2.2)

A pricing strategy is the approach a business takes to setting a price. The specification names “pricing strategies” without listing them. These are the standard ones.

Strategy	What it means	When it may suit
Penetration pricing	A low price at launch to win customers and market share quickly	New product in a market with many rivals; customers who switch easily
Price skimming	A high price at launch, lowered later	New or unusual product with few rivals; buyers who want to be first
Competitive pricing	A price close to rivals’ prices	Many similar products; customers who compare prices
Cost-plus pricing	Unit cost plus a mark-up	Simple, when the business knows its costs and wants a set profit on each unit
Psychological pricing	A price that looks lower, such as £2.99	Everyday goods where the price seems to matter
Promotional pricing	A temporary price cut or deal	Clearing stock; encouraging a first purchase

Cost-plus in its standard form is: selling price = unit cost + (unit cost × mark-up percentage).

Worked example 4: cost-plus and psychological pricing

Pennack Pastries bakes a cheese scone at a unit cost of £1.80. The owner uses a 60% mark-up.

• Mark-up: 1.80 × 0.60 = £1.08.
• Price: 1.80 + 1.08 = £2.88.
• A psychological alternative is £2.99, which keeps the profit per scone at £1.19.

Cost-plus ignores what customers will pay and what rivals charge. If a rival sells similar scones at £2.40, £2.88 may lose sales.

Worked example 5: penetration against skimming

Thornick Labs launches a desk lamp that costs £90 a unit to make. If it skims at £220, it expects 500 sales a month, a total contribution of 500 × (220 − 90) = £65,000. If it later lowers the price to £140, it expects 1,400 sales: 1,400 × (140 − 90) = £70,000. Skimming works here because early buyers pay a high price and the later cut opens up a larger market. Penetration would start low to win share sooner, but the profit on each unit would be lower from the start.

6. Influences on pricing strategies (2.2.2)

Technology

Technology lets customers compare prices quickly online, which pushes prices towards the competitive level. It can also lower costs, through automation and online selling, giving room to cut prices or keep a larger profit. Online sellers can change prices easily, which supports promotional pricing.

Competition

The more close rivals there are, the less freedom a business has, so it may use competitive or penetration pricing. A differentiated product with few rivals can use skimming or a higher price. A rival’s price cut may force a response.

Market segments

A market segment is a group of customers with shared characteristics. Segments may be willing to pay different prices.

For example, Pennack’s café has 80 office workers at £6.50 per lunch and 140 students at £4.50. Revenue is 80 × 6.50 + 140 × 4.50 = 520 + 630 = £1,150. If one price of £6.50 drove away most students, with only 40 buying, revenue would be (80 + 40) × 6.50 = £780. If one price of £4.50 kept all 220 customers, revenue would be 220 × 4.50 = £990. Pricing for each segment earns more.

Product life cycle

Pricing changes through the life cycle. Skimming or penetration suits introduction. Competitive pricing is common in growth and maturity as rivals enter. In decline, promotional pricing can clear stock.

Common errors

• Defining differentiation as “being different” without saying customers must value the difference.
• Naming a life cycle phase without using the data or the context.
• Describing an extension strategy but not weighing its cost against the extra sales.
• Mixing up penetration (low launch price) and skimming (high launch price).
• Calling a strategy “best” without linking it to the market, the competition or the phase of the product.

Next steps

Use the revision notes, then test yourself with the practice questions. Try the free diagnostics too.

Frequently asked questions

Why is differentiation important to a business? Differentiation gives customers a reason to choose the business without it having the lowest price, can support a higher price and can build loyalty. It only works if customers notice and value the difference.

What is an extension strategy? An extension strategy is an action that keeps a product’s sales up and lengthens its life, such as modifying the product, finding a new market or a new use, or changing packaging, price or promotion. Its cost should be weighed against the extra sales.

What is psychological pricing? Psychological pricing sets a price that looks lower than it is, such as £2.99 instead of £3. It is often used for everyday goods where the price seems to matter.

How does the product life cycle affect pricing? Skimming or penetration pricing suits the introduction phase, competitive pricing is common in growth and maturity as rivals enter, and promotional pricing can clear stock in decline.

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.