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