Premium pricing targets individuals who are more concerned about prestige and image. The value of the product is perceived more than the competing products due to its speciality, limited supply. This pricing strategy is also called as skim pricing as it essentially targets the top buyers who can afford to spend more. It prevents competitors from entering the marketplace with similar capital as the product would be already established and a similar product wouldn’t be considered to be of more value as the exclusivity of the product would dilute.
Brand awareness increases with this type of marketing. As the products are assumed to be more valuable and prestigious owing to their price, it creates interest and desire to own the product. The most important advantage of premium pricing is the profit margin.
But premium pricing comes with its share of disadvantages. Although the profit margins are higher, companies must consider the marketing costs which are substantially high in creating the product awareness. Increased completion from similar products offering the same benefits would reduce the exclusivity, and it would be harder to sustain the same pricing strategy. Additionally, the smaller target market will offset the total revenue considerably (Maguire, 2015).
This approach is used when a new product or brand has to be established in the market in short time. When the products are not exclusive and have many similar products to compete with, this strategy fends of competition. The pricing should be supported with strong supply and distribution chains. The advantages include increased sales, which partly covers for the low profit margin. Reduced cost price due to mass production, increased customer base and reduced competition. If the product is perceived as “cheap” it would be hard to compete with similar products which are priced higher, Increased inventory and price war from competitors (Watkins, 2015).
This strategy involves products which are sold as a package by the companies at a discounted price. This strategy targets the concept of consumer surplus. When a product is offered at a lower price than what the consumer is willing to pay the difference between both the prices is called consumer surplus. This strategy is used in case of closely associated products, and each cusutomer has a different priority for the associated products. By combining the products and selling them at a lower price, the consumer considers it a good choice and would be willing to pay for the package. The companies benefit by increased revenue as they sell more products (Merritt, 2015).
This strategy is used when companies want to maintain the sales revenue during a off peak period. This strategy can also be useful when companies are short of cash and want to increase cash flow instantly. Additionally the existing customer base can be targeted exclusively to retain them. It helps companies attract new customers and targets a wider market because of the low prices. The value of the product is perceived as high as the promotional offer is run for a short period and the originals prices are still used for reference of how much savings the customers are making by buying during this period. This strategy can also be useful when companies are short of cash and want to increase cash flow instantly. As the promotions attract a large number of customers it provides a good opportunity for the companies to give the customers a good experience and hoping that they would return (kokemuller, 2015).
When new products are offered at a lower price to attract customers in a short time, companies increase prices of products which are necessary to maintain the new products (Anderson, 2015).
Anderson, C. (2015). What Is Captive Product Pricing?. [online] Smallbusiness.chron.com. Available at: http://smallbusiness.chron.com/captive-product-pricing-18657.html [Accessed 1 May 2016].
Kokemuller, N. (2015). Benefits of a Promotional Pricing Strategy. [online] Smallbusiness.chron.com. Available at: http://smallbusiness.chron.com/benefits-promotional-pricing-strategy-59438.html [Accessed 2 May 2016].
Maguire, A. (2015). Premium Pricing: Will It Work for Your Business | QuickBooks. [online] QuickBooks. Available at: http://quickbooks.intuit.com/r/pricing-strategy/whats-a-premium-pricing-strategy-and-will-it-work-for-your-business/ [Accessed 1 May 2016].
Merritt, C. (2015). Bundle Pricing Strategy. [online] Smallbusiness.chron.com. Available at: http://smallbusiness.chron.com/bundle-pricing-strategy-67049.html [Accessed 2 May 2016].
Watkins, D. (2015). What Is Market Penetration Pricing?. [online] Smallbusiness.chron.com. Available at: http://smallbusiness.chron.com/market-penetration-pricing-20346.html [Accessed 1 May 2016].