IB Business Pricing Methods

The Day Wendy's Tried to Charge You More for a Burger at Lunchtime

In February 2024 Wendy's CEO Kirk Tanner announced they were investing $20 million in digital menu boards. Everyone was happy, fancy screens showing off those juicy burgers. But minutes later, he announced they were planning to use "dynamic pricing" starting in 2025. Translation? Wendy's Dave Single might cost £7 at noon when you're starving, but only £4.50 at 3pm when nobody's there.

The internet wasn't happy at all.

Within hours, social media was ablaze with people comparing Wendy's to Uber surge pricing during a rainstorm. Memes everywhere. The result? Wendy had to backpedal faster than a cyclist going downhill with no brakes, insisting they'd never raise prices during busy times - no, no, they'd only lower them during quiet periods. Sure, Kirk.

Today we are dealing with pricing methods and we will explore why getting the price wrong can sink your business faster than Mike Tyson throw a punch.

The Basics: How Do Businesses Set Prices?

In IB Business Management, pricing methods are the various ways businesses determine what to charge for their goods and services. Managers consider loads of factors: production costs, competitor prices, market conditions and so on.

Let's start simple and work our way up to the more advanced (HL) material.

The IB Trainer's IB Business Management Activity Book covers:

✓ All 6 IB Business Management modules (5 Modules + the Complete IB Business Management Toolkit), broken down unit-by-unit

✓ 2-6 case studies per unit (some units need more practice than others)

✓ Every IB Business Management Assessment Objective (AO) explicitly addressed

✓ All 15 IB Business Management Toolkit tools with worked examples

✓ IB Business Exam Socially responsible companies (business as force for good)

✓ Platform access with supporting video content

Cost-Plus Pricing: Maths You Can Actually Do

Cost-plus pricing (also called mark-up pricing) is basically the pricing method for people who liked GCSE maths. You take your costs, add a profit margin on top, and boom - that's your price.

The formula's dead simple: Price = Cost of production + Profit margin

IB Business Management Real-life Example: Say you're running a small bakery. Each croissant costs you £0.80 to make (flour, butter, the tears of your overworked assistant). You want a 50% profit margin. So: £0.80 × 1.5 = £1.20 per croissant.

Done. Easy. Go home.

Advantages:

• Simplest pricing method going

• Straightforward to calculate (even at 6am before coffee)

• Ensures you at least break even on each sale

Disadvantages:

• Completely ignores what rivals are charging (which could be £0.90)

• Doesn't focus on maximising demand

• Assumes customers will pay whatever you decide

This is why you see cost-plus pricing mainly used by businesses with unique products, or industries where everyone charges roughly the same anyway.

Penetration Pricing: The "Free Sample" Strategy

IB Business Management Real-life Example: Right, remember when Disney+ launched in 2019 at £6.99 a month - a lot cheaper than Netflix? That wasn't generosity. That was penetration pricing: setting your price low enough to break into an industry and steal market share from existing firms.

Disney knew Netflix was the big dog. So they undercut them massively. By 2024, Disney+ had raised prices to £15.99 for the ad-free plan, but by then they'd already got millions hooked on The Mandalorian series and couldn't leave.

Penetration pricing involves advertising a "special introductory price offer" to create brand awareness when launching a new product or entering a new market. It's a short-to-medium term strategy because eventually you need to actually, you know, make money.

Advantages:

• Lets you enter a market and grab market share rapidly

• Low prices discourage new competitors (who'd enter a market with razor-thin margins?)

• Can force you to cut costs and improve efficiency just to survive

• Creates word-of-mouth buzz ("Have you SEEN how cheap this is?!")

Disadvantages:

• If costs suddenly spike, you're making losses

• Customers might think "cheap price = rubbish quality"

• People get used to low prices and throw a strop when you raise them

• You might lose customers who care more about quality than savings

IB Business Management exam tip: Don't repeat yourself in IB papers. If asked for two advantages of penetration pricing, saying "to gain more customers" and "to increase market share" is basically the same point. Examiners won't give you credit for that.

Loss Leaders: Deliberately Losing Money (But In a Smart Way)

Walk into any UK supermarket and you'll see this in action. Loss-leader pricing means selling something below cost to get customers through the door, where they'll hopefully buy loads of other, more profitable stuff.

Tesco might sell bread for £0.45 when it costs them £0.60 to stock. Why? Because you won't just buy bread. You'll grab milk, cheese, some Hobnobs, maybe a bottle of wine for later, and before you know it, you've spent £40.

It's a short-term tactic for specific products. Businesses usually limit how many loss leaders each customer can buy (otherwise someone would clear the shelves and sell them on eBay).

Advantages:

• Builds customer loyalty (everyone loves a bargain)

• Increased revenue from all the other stuff people buy

• Great way to shift old stock nobody wants

Disadvantages:

• Customers expect loss leaders constantly (expensive to maintain)

• No guarantee they'll buy anything else

• Requires lots of stock, which creates storage headaches

Predatory Pricing: The Illegal Option

Predatory pricing means deliberately charging stupidly low prices - even below cost - to harm rivals and restrict competition.

Imagine a massive supermarket chain sees a new competitor opening nearby. They could slash prices so low that the new guy can't possibly compete, forcing them out of business. Once the competitor's dead, prices go back up.

This is what causes price wars - when firms continually reduce prices to destroy each other. And right now, UK supermarkets are locked in one of the most vicious price wars in recent memory.

IB Business Management Real-life Example: In 2025, Tesco, Asda, Sainsbury's, Aldi, and Lidl are involved in a constant price war. Tesco's using its Clubcard to offer lower prices to members (non-members feel robbed). Asda's launched "Just Essentials" with bright yellow packaging screaming "WE'RE CHEAP!" Sainsbury's has its "Aldi Price Match" on hundreds of items.

Meanwhile, Aldi and Lidl sit there with their permanent low prices, not needing loyalty schemes or gimmicks, just pure discount power. They now control nearly 20% of the UK grocery market.

The result? Tesco's forecast profit dropped by up to £400 million as they prepare for battle. That's how expensive price wars are.

Advantages of predatory pricing:

• Low prices pull customers from rivals

• If customers are price-sensitive, revenue increases

• Acts as a barrier to entry for new firms

Disadvantages:

• Illegal in many countries (the EU prohibits it)

• Can spark quality concerns

• Can trigger a full-blown price war where everyone loses

• Unsustainable long-term

Premium Pricing: Expensive IS the Point

On the complete opposite end, we have premium pricing (or prestige pricing) - charging prices substantially above the market average to signal quality, luxury, and superiority.

IB Business Management Real-life Example: Think Hermès. You can't just walk into a shop and buy a Birkin bag. You need a personal shopper, months of "relationship building" with the store, and then maybe they'll let you on the informal waitlist. Single Birkin bags have sold at auction for over $450,000. Not because they're 450 times better than a £1,000 handbag. Because exclusivity itself has value.

Premium pricing works when customers aren't price-sensitive - usually because of massive brand loyalty.

In 2024-2025, luxury brands hit a strange moment. After years of raising prices (Chanel, Louis Vuitton, Dior all hiked prices during the pandemic), customers started experiencing price fatigue. Luxury goods sales dropped for the first time in 15 years. Even rich people were going "Hang on, this is getting ridiculous."

Chanel's operating profit fell 30% in 2024. The brand that usually raises prices twice a year? Didn't in 2025. That's how you know things are rough.

But brands like Porsche still thrive. With a price acceptance score of 9.3 out of 10, customers are happy to pay premium prices because they trust the quality and status it brings.

Advantages:

• Higher profit margins

• Premium prices increase brand value

• Products become status symbols (free marketing from customers showing off)

Disadvantages:

• Limited customer base (not everyone can afford a Rolex)

• High R&D costs to justify premium quality

• High marketing costs to maintain the prestige image

• Doesn't work for most products in competitive markets

Dynamic Pricing

Remember Wendy's? Let's cover dynamic pricing (HL topic), also called surge pricing.

Dynamic pricing adjusts prices based on different time periods to reflect changes in demand levels. When demand surges, prices go up. When it's quiet, prices drop.

You've experienced this quite a few times without noticing:

• Uber charges more at 5pm on a Friday (everyone leaving work)

• Airlines charge more for school holiday flights

• Theme parks (Disney, Universal Studios) charge more in summer than winter

In 2025, this is becoming everywhere. Walmart's rolling out electronic shelf labels in 2,300 US stores - prices can change in minutes based on demand, inventory, and competitor prices. Kroger, Whole Foods, Lidl are all doing it.

FIFA announced they'll use dynamic pricing for the 2026 World Cup tickets. Expect to pay an absolute fortune for the final.

Dynamic pricing relies on sophisticated algorithms, big data, and management information systems to track demand in real-time and adjust accordingly.

Advantages:

• Peak period prices = higher profit margins

• Off-peak discounts help maximise capacity usage

• Helps with stock control (discount overstocked items)

Disadvantages:

• Customer dissatisfaction (nobody likes paying more than someone else for the same thing)

• Reduces brand loyalty (people hunt for better deals elsewhere)

• Time-consuming to monitor market conditions constantly

The Wendy's disaster shows why this backfires: 64% of diners said they'd have a negative reaction to restaurants using surge/dynamic pricing, and 81% would either stop going or change when they eat to avoid higher prices. That's catastrophic for a fast-food chain.

As one senator put it: "Charging grandma $10 for a burger at noon but $6 at 3pm feels like price gouging, not innovation."

Competitive Pricing: Just Match the Other Guys (HL)

Competitive pricing is wonderfully simple: set your prices based on what rivals charge.

This is massive in supermarkets. Tesco literally has people checking Aldi's prices weekly. If they drift too far above, they lose credibility and customers bolt.

It's common in markets where customers can easily compare products - like groceries, petrol, or online shopping (price comparison websites have made this even easier).

Advantages:

• Keeps you competitively priced and protects market share

• Low-risk strategy for new businesses

Disadvantages:

• Can spark price wars (if one drops, everyone drops, profit margins disappear)

• Price isn't the only competitive factor - quality and branding matter too

Contribution Pricing: The Break-Even Obsessed Method (HL)

Finally, contribution pricing (HL) sets prices that exceed variable costs per unit, so each sale contributes toward fixed costs. Once fixed costs are covered, you're in profit.

IB Business Management Real-life Example: Say a restaurant has:

• Average meal price: £25

• Average variable cost per meal: £13

• Total fixed costs: £6,000/month

Unit contribution = £25 - £13 = £12

Break-even output = £6,000 ÷ £12 = 500 meals per month

If they want to break even faster, raise the price to £28: Break-even = £6,000 ÷ (£28 - £13) = 400 meals per month

Advantages:

• Helps you know exactly how many units you need to sell

• Flexible - uses existing cost data

• Useful for one-off special orders or contracts

Disadvantages:

• Contribution ≠ profit (higher prices don't guarantee customers will buy)

• Allocating fixed costs between products can be subjective

• Might lead to uncompetitive pricing

IB Business Management Exam Corner

In 2025, pricing is more complex and controversial than ever. Walmart's experimenting with electronic price tags that could change while you're shopping. UK supermarkets are burning through hundreds of millions in profit fighting price wars. Luxury brands are desperately trying to justify why a handbag costs more than a used car.

The lesson for your IB Business Management exam? Context is everything. Cost-plus works brilliantly for a small bakery but would be disaster for Disney+. Premium pricing is perfect for Hermès but useless for Tesco. Penetration pricing got Disney+ millions of subscribers but nearly bankrupted smaller streaming services trying the same trick.

And dynamic pricing? Well, Wendy's learned the hard way that there's a massive difference between "innovative pricing strategy" and "making people feel ripped off."

Price is a signal about quality, value, and what you stand for as a brand. Get it right, and you dominate your market. Get it wrong, and the internet will roast you harder than those burgers you're trying to sell.

Stay well,