Sweet Pricing

By the end of this lesson, you will learn:

how value-based, competitive, cost-based, and penetration pricing work, and when a business might choose each one;
how market conditions — such as supply-chain shortages, inflation, recession, competition, and price elasticity of demand — increase or limit a business's pricing power;
which legal constraints (laws against price fixing, price gouging, price discrimination and predatory pricing) limit how businesses set prices;
how to use AP task verbs to answer exam-style multiple-choice and free-response questions about pricing;
how to write a pricing strategy hypothesis for your Business Canvas Project.

Your name

Working on your own? No problem. Follow the blue "On your own" boxes in each station, type your answers in the boxes, and turn in your work summary at the end (Station 8). Stuck? Open the 🎬 short explainer video in that station. Your answers are saved in this browser as you go.

Warm Up: Which Bar Wins Your Dollar?

5 min

Three chocolate bars sit at the checkout. You can buy exactly one. Tap your pick.

Which characteristic of you as a customer drove your choice — price sensitivity, status, convenience, values, health, or brand loyalty? Explain in 1–2 sentences.

On your own: Pick a bar, read the feedback, and answer the question above. Then tap the three fact cards below.

Did You Know? (tap to flip)

Pricing Strategy Sort

7 min

Businesses don't pick prices out of a hat. Here are four common pricing strategies:

Value-based

Price is set by what customers believe the product is worth — brand, quality, exclusivity, experience.

Competitive

Price is set at, slightly above, or slightly below what competitors charge for similar products.

Cost-based

Start with the per-unit cost, then add the profit you want on each unit. Per-unit cost + desired per-unit profit = price. Common when costs are clear, like custom orders.

Penetration

Launch with a low price to attract customers away from established rivals and grab market share fast.

Stuck? Watch a 1-minute explainer: Four Pricing Strategies

Match each chocolate product to its strategy

On your own: Read the four strategies, choose one for each product from its menu, then click "Check my matches." Read every explanation, even for the ones you got right.

The Cocoa Crunch: Who Has Pricing Power?

8 min

Pricing power is a business's ability to raise prices without losing too many customers. Market conditions can give a business more of it — or take it away. A key idea: price elasticity of demand. If customers buy a lot less when the price goes up, demand is elastic (pricing power is low). If they keep buying anyway, demand is inelastic (pricing power is high).

Stuck? Watch a 1-minute explainer: Pricing Power and Elasticity

Wait… my bar costs the same, but there's less of it?!

Shrinkflation: when costs rise but pricing power is weak, some companies keep the price the same and shrink the product instead. Smart strategy or sneaky? You decide in the box below.

Headline 1 of 6

Score: 0 / 0

Shrinkflation: smart pricing or sneaky? Defend your answer in 1–2 sentences, and say what it would do to customer trust.

On your own: For each of the six headlines, decide whether it increases or limits pricing power, read the explanation, then click "Next headline." Finish with the shrinkflation question.

Price Your Bar Lab

15 min

You're the marketing manager for a new small-batch chocolate bar. The main competitor sells a similar bar for $3.00. Choose your customer and strategy, set your price, and watch how demand and profit respond. Different customer segments react to price differently!

1 · Product & customer Bar name Flavor Target customer segment

2 · Pricing strategy

Value-based Competitive Cost-based Penetration

Your price per bar

3 · Costs

Cocoa (per bar)

Sugar, milk, mix-ins & wrapper (per bar)

Fixed costs per month (kitchen rent, equipment)

Business Dashboard

Competitor's price$3.00

Variable cost per bar

Contribution margin per bar

Projected bars sold / month

Break-even point

Projected revenue

Projected profit (loss)

⚡ Cocoa Shock!

A bad harvest doubles your cocoa cost overnight — a supply-chain market condition. How will you respond?

Stuck? Watch a 1-minute explainer: Contribution Margin and Break-Even

How demand works here: projected sales depend on your price compared with the competitor's $3.00 and on how price sensitive (elastic) your segment is. Teens drop off fast when the price climbs; gift shoppers barely notice. Contribution margin = price − variable cost. Break-even = fixed costs ÷ contribution margin.

Justify your pricing decision: Which strategy did you choose, what price did you set, and why is it the best fit for your target customer and market conditions? How did you respond to the Cocoa Shock?

On your own: Try at least three different prices and two different customer segments before you decide. Watch how projected sales change. Then trigger the Cocoa Shock, adjust your plan, and write your justification above.

The Legal Line

5 min

Businesses have a lot of freedom to set prices, but that freedom has limits. Laws protect fair competition and consumers:

Price fixing: competitors may not secretly agree to set prices.
Predatory pricing: a business may not price below cost to drive rivals out of business.
Price gouging: sellers may not raise prices because demand jumped during a crisis, such as a natural disaster (illegal in many states).
Price discrimination: a business may not charge different prices for the same product based on race, nationality, sex or another protected status.

Remember: a high price is not automatically illegal! Discounts for groups like students can be legal. Pricing based on a protected status is not.

Stuck? Watch a 1-minute explainer: Legal Limits on Pricing

On your own: Choose a ruling for all five cases, then click "Check my rulings" and read each explanation.

Exit Ticket

5 min

Answer all five questions on your own, then check your work.

AP Exam Practice

25 min · next class or homework

Now practice the way the AP Exam asks. These questions follow the College Board sample questions in the course and exam description. There's a multiple-choice set built around a scenario and a figure, a Business Concept Application free-response question (FRQ 3 on the exam) and a practice version of the Business Decision free-response question (FRQ 4 on the exam).

On your own: Watch the task verb video if you need it. Answer the multiple-choice set, then write each free-response part before you open its scoring guidelines. Score yourself honestly. That's how you'll know what to practice next.

Need help? Watch a short explainer on reading task verbs

Know Your Task Verbs

Identify: Indicate or provide information about a specified topic, without elaboration or explanation.
Describe: Provide the relevant characteristics of a specific topic or concept.
Explain: Provide information about how or why a relationship, process, pattern, position, situation, or outcome occurs, using evidence and/or reasoning to support or qualify a claim.
Compare: Provide a description of similarities and/or differences.
Recommend: Articulate a course of action and support it with evidence.
Pitch: Describe the product, the target customer, the problem, need, or want the product is intended to address; and explain how the product creates value for customers.

Definitions quoted from the AP Business with Personal Finance Course and Exam Description (College Board), “Task Verbs Used in Free-Response Questions.” Task verbs are highlighted in the prompts below.

Multiple Choice

Questions 1 through 4 refer to the following.

Bean & Blossom Chocolate (B&B) is a startup that makes dark chocolate bars from ethically sourced cocoa. B&B plans to sell its bars at specialty grocers next to several established brands. To attract customers away from those brands quickly, B&B will launch its bar at $2.50. It plans to raise the price to $3.50 once it reaches its market share goal.

A survey of shoppers in B&B’s target market found that 70% would switch to a different brand if the price of their usual chocolate bar rose by $0.50. The figure shows the prices and per-unit costs of B&B’s planned bar and three rival bars.

Figure 1. Chocolate Bar Prices and Per-Unit Costs
Brand	Price	Per-unit cost
B&B (launch price)	$2.50	$2.10
Choco Royale	$3.25	$1.85
SweetCo	$2.99	$1.60
Value Bar	$1.49	$0.95

Free Response: Business Concept Application 3 points

Peak Cocoa sells a milk chocolate bar in supermarkets. Rival bars in the candy aisle are very similar and are priced between $2.29 and $2.99. Peak Cocoa’s goal is to increase weekly revenue without losing customers to these rivals.

The marketing team ran a three-week in-store price test. Three similar stores each sold the bar at a different price, and the team recorded weekly sales at each store. The team also reviewed an industry report showing that cocoa costs rose sharply over the past year. The figure shows the results of the price test.

Figure 2. Peak Cocoa Price Test Results (weekly averages)
Store	Test price	Bars sold per week	Weekly revenue
Store 1	$2.49	600	$1,494.00
Store 2	$2.99	540	$1,614.60
Store 3	$3.49	300	$1,047.00

Respond to parts A, B, and C.

(A) Describe a market research method Peak Cocoa used to gather the information in the scenario.

Check against the scoring guidelines (1 point)

Examples that earn this point:

Peak Cocoa conducted primary research by running an in-store price test, selling the bar at three different prices in three similar stores and recording weekly sales.
Peak Cocoa ran an experiment that tested how customers responded to different prices.
Peak Cocoa used secondary research when it reviewed an industry report on cocoa costs.

My response earns this point

Does not earn credit: Naming a method with no detail from the scenario (for example, “they did research”), or naming a method that doesn't appear in the scenario, such as a focus group.

(B) Describe a finding revealed by the research.

Check against the scoring guidelines (1 point)

Examples that earn this point:

At $2.99, the bar generated the highest weekly revenue, $1,614.60.
When the price rose from $2.99 to $3.49, weekly sales fell from 540 to 300 bars, nearly cutting sales in half.
Raising the price from $2.49 to $2.99 reduced sales only slightly, from 600 to 540 bars, but increased revenue.
Cocoa costs rose sharply over the past year, according to the industry report.

My response earns this point

Does not earn credit: A finding with no data or detail from the scenario (for example, “price matters to customers”).

(C) Explain how Peak Cocoa could use a finding from the research to achieve a business goal.

Check against the scoring guidelines (1 point)

Examples that earn this point:

Because $2.99 produced the most revenue and is still within rivals' $2.29–$2.99 range, Peak Cocoa could use competitive pricing at $2.99 to increase weekly revenue without losing customers to rivals.
Sales dropped sharply at $3.49, which shows customers are highly price sensitive above $2.99. Peak Cocoa should avoid that price, because it would push customers to rival bars and lower revenue and market share.
Because cocoa costs are rising but customers respond strongly to price, Peak Cocoa has limited pricing power. It could raise its price only to $2.99 and look for other ways to cut per-unit costs to protect profit.

My response earns this point

Does not earn credit: Restating a finding without connecting it to a goal, or naming a goal without explaining how the finding helps reach it (no “because” or “which leads to” link).

Free Response: Business Decision (practice version) 6 points

You have been hired as a consultant to help the business described in the scenario decide between two possible courses of action.

One year after launch, Bean & Blossom Chocolate (B&B) reached its market share goal and now sells its 3.0-ounce bar for $3.50. B&B sells about 1,000 bars per week. Its brand is built on ethically sourced cocoa and honest labeling, and loyal customers often recommend the brand online.

After poor cocoa harvests in West Africa, B&B’s per-unit cost for the 3.0-ounce bar rose from $2.10 to $2.80. A customer survey found that 62% of B&B customers check package size when they shop. It also found that 70% would feel “misled” if a brand made a product smaller without telling them.

Option 1: Raise the price. Keep the 3.0-ounce bar and raise the price to $3.99.
Option 2: Shrink the bar. Keep the $3.50 price and reduce the bar to 2.6 ounces. This uses less cocoa, so the per-unit cost falls to $2.45. Projected sales assume most customers will not notice the change.

Figure 3. Projected Results of B&B’s Two Options
Option	Price	Per-unit cost	Per-unit profit	Projected bars sold per week	Projected weekly profit (before fixed costs)
1: Raise the price	$3.99	$2.80	$1.19	800	$952.00
2: Shrink the bar	$3.50	$2.45	$1.05	950	$997.50

Respond to parts A, B, and C.

(A) Like all businesses, B&B is affected by market and external factors that have an impact on its ability to achieve its goals.
i. Describe a market or an external factor indicated in the scenario that affects B&B.
ii. Explain how the factor you selected in part A(i) creates an opportunity or a problem for B&B.

Check against the scoring guidelines (2 points)

i. Describe a factor (1 point)

Examples that earn this point:

Poor cocoa harvests in West Africa (an external, supply-chain factor) raised B&B's per-unit cost from $2.10 to $2.80.
B&B's customers are attentive shoppers: 62% check package size.

My response earns this point

ii. Explain how it creates an opportunity or a problem (1 point)

Examples that earn this point:

The cocoa shortage is a problem because it cuts B&B's per-unit profit from $1.40 to $0.70 at the current price. B&B has to raise its price, reduce its costs or accept much lower profit.
Because so many customers check package size, shrinking the bar is a problem. Customers are likely to notice, which could hurt the trust B&B's brand depends on.

My response earns this point

Does not earn credit: Naming a factor without scenario evidence, or describing the factor again in part ii without explaining its effect on B&B.

(B) There are financial and nonfinancial criteria that can be used to compare the two options.
i. Using projected weekly profit as a criterion, describe a difference or similarity between the two options. Include specific evidence related to each option.
ii. Using one nonfinancial criterion relevant to the decision, describe a difference or similarity between the two options. Include specific evidence related to each option.

Check against the scoring guidelines (2 points)

i. Financial criterion (1 point)

Examples that earn this point:

Option 2 has a higher projected weekly profit ($997.50) than Option 1 ($952.00), a difference of $45.50 per week.
Both options are projected to stay profitable, earning $952.00 and $997.50 per week before fixed costs.

My response earns this point

ii. Nonfinancial criterion (1 point)

Examples that earn this point:

Customer trust and brand reputation: Option 1 keeps B&B's honest-labeling promise by openly raising the price. Option 2 risks the 70% of customers who would feel misled by a smaller bar.
Customer loyalty: under Option 1, some price-sensitive customers may leave (sales are projected to drop to 800). Under Option 2, loyal customers who notice the smaller bar may stop recommending B&B online.

My response earns this point

Does not earn credit: A comparison that uses evidence for only one option, or a nonfinancial criterion that isn't connected to the scenario.

(C) Recommend a course of action for B&B. In your response, you should do the following:
• Recommend one of the two options in the scenario.
• Explain why you recommend that option.
• Support your recommendation using two specific criteria, which may include the criteria from part B. Include evidence from the scenario related to each criterion you use.

Check against the scoring guidelines (2 points)

Recommend and explain (1 point)

Examples that earn this point:

I recommend Option 1. Raising the price openly protects the honest brand that B&B's loyal customers value, which matters more in the long run than a small short-term profit difference.
I recommend Option 2. It earns more profit each week while keeping the price customers are used to, which protects B&B's market share.

My response earns this point

Support with two criteria and evidence (1 point)

Examples that earn this point:

Option 1: Although it earns $45.50 less per week ($952.00 vs. $997.50), it avoids misleading the 70% of customers who would feel misled by a smaller bar. That protects the trust and online recommendations B&B's brand depends on.
Option 2: It earns $997.50 per week instead of $952.00, and keeping the $3.50 price avoids losing about 200 price-sensitive customers each week. B&B could reduce trust risk by clearly labeling the new size.

My response earns this point

Does not earn credit: Recommending both options or neither (“it depends”), or a recommendation without evidence from the scenario for each criterion.

On the actual exam, the Business Decision question is worth 8 points. You'll compare the options using projected return on investment plus additional financial and nonfinancial criteria, then support your recommendation with three criteria. This practice version uses two criteria.

Connect to Your Business Canvas Project

3 min

Price and pricing strategy is a Business Canvas Project element that requires hypothesis testing. Use today's thinking to draft a first pricing strategy hypothesis for your own product.

We believe that [target customer] will pay [price] for [product] using a [pricing strategy] strategy, because [reason: customer values, costs, competitor prices, or market conditions]. We will test this by [research method].

My draft pricing strategy hypothesis:

Turn in your work

Click the button to collect all your answers. Then copy and paste them into your class assignment, or print / save as PDF.