Pricing - other pricing strategies

Author: Jim Riley  Last updated: Sunday 23 September, 2012

Prestige pricing

Prestige pricing refers to the practice of setting a high price for an product, throughout its entire life cycle – as opposed to the short term ‘opportunistic’, high price of price ‘skimming’. This is done in order to evoke perceptions of quality and prestige with the product or service.

For products for which prestige pricing may apply, the high price is itself an important motivation for consumers. As incomes rise and consumers become less price sensitive, the concepts of ‘quality’ and ‘prestige’ can often assume greater importance as purchasing motivators. Thus advertisements and promotional strategies focus attention on these aspects of a product, and, not only can a ‘prestige’ price be sustained, it also becomes self-sustaining.

Pre-emptive pricing

Pre-emptive pricing is a strategy which involves setting low prices in order to discourage or deter potential new entrants to the suppliers market, and is especially suited to markets in which the supplier does not hold a patent, or other market privilege and entry to the market is relatively straightforward.

By deterring other entrants to the market, a supplier has time to

• Refine/develop the product
• Gain market share
• Reduce costs of production (through sales/ experience effects)
• Acquire name/brand recognition, as the ‘original’ supplier

Extinction pricing

Extinction pricing has the overall objective of eliminating competition, and involves setting very low prices in the short term in order to ‘under-cut’ competition, or alternatively repel potential new entrants.

The extinction price may, in the short term, be set at a level lower even than the suppliers own cost of production, but once competition has been extinguished, prices are raised to profitable levels.
Only firms dominant in the market, and in a strong financial position will be able survive the short-term losses associated with extinction pricing strategies, and benefit in the longer term.

The strategy of extinction pricing can be used selectively by firms who can apply it either to limited geographical markets (making up any losses by increasing prices in other geographical markets), or to certain product ‘lines’. In the latter case, the low price of a product at one end of the product range might attract new purchasers to the product line, and sales of different, more profitable items might increase.

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