It is estimated that pneumonia is responsible for 15% of childhood deaths worldwide. Recent research has shown that hypoxia and malnutrition are strong predictors of mortality in children hospitalized for pneumonia. It is estimated that 15% of children under 5 who are hospitalized for pneumonia have hypoxaemia and that around 1.5 million children with severe pneumonia require oxygen treatment each year. We developed a deterministic compartmental model that links the care pathway to disease progression to assess the impact of introducing pulse oximetry as a prognostic tool to distinguish severe from non-severe pneumonia in under-5 year olds across 15 countries with the highest burden worldwide. We estimate that, assuming access to supplemental oxygen, pulse oximetry has the potential to avert up to 148,000 deaths if implemented across the 15 countries. By contrast, integrated management of childhood illness alone has a relatively small impact on mortality owing to its low sensitivity. Pulse oximetry can significantly increase the incidence of correctly treated severe cases as well as reduce the incidence of incorrect treatment with antibiotics. We also found that the combination of pulse oximetry with integrated management of childhood illness is highly cost-effective, with median estimates ranging from US$2.97 to $52.92 per disability-adjusted life year averted in the 15 countries analysed. This combination of substantial burden reduction and favourable cost-effectiveness makes pulse oximetry a promising candidate for improving the prognosis for children with pneumonia in resource-poor settings.