Pricing Strategies

There are seven main pricing strategies that a business may use:
 Premium pricing
 Penetration pricing
 Economy pricing
 Skim pricing
 Psychological pricing
 Captive product pricing
 Product line pricing

Premium Pricing
This is where a business keeps the price of a product or service high in order to encourage customers to
associate it with high quality. There can be a tendency in customers – particularly with technology or
premium foods – to assume that the high price relates to, for example, a better reputation.

Penetration Pricing
This is when a product is sold into a market at a low initial price in order to generate sales before the
price is increased. This helps break down any barriers to the market and generates sales volume, but not
necessarily profit, so it can be used as a short-term strategy to gain market share. Next time you see a
product market with ‘introductory offer’, you should think of this as an example of penetration pricing.

Economy Pricing
Economy pricing is the deliberate setting of a low price in order to boost sales.

Skim Pricing
At the launch of a new product there will be less competition in the marketplace. Skimming involves
setting a reasonably high initial price in order to get high initial returns from those consumers who are
willing to buy the new product. As other similar products enter the marketplace, then the price is
lowered to remain competitive. This strategy is often adopted by technology companies that benefit
from ‘early adopters’.

Psychological Pricing
Psychological pricing is a customer based pricing method, relying on consumer’s emotive responses,
subjective views and feelings towards specific purchases. Products such as designer perfumes need to
be priced at high prestige levels, otherwise they will not sell. Customers equate higher quality with
higher prices.

Psychological pricing can also refer to pricing that ends purposely with a 9, rather than rounding it up,
for example a product selling for $7.99 rather than $8.00. This is because consumers automatically feel
that $8 is much higher than $7, when in reality, the price difference is only $0.01. This can make a
dramatic change in consumer behavior.
Captive Product Pricing
Captive product pricing is a strategy that can apply to products with consumable supplies – for example,
printers need ink cartridges, razors need razor blades, plug in air fresheners need refills. This is where
the pricing of the supplies is high, but the initial purchase might be quite low.

For example, a razor might cost relatively little and come with a couple of spare blades. However, once a
customer has purchased this, only a specific make of razor blades will fit the razor, and these will be
priced comparatively high.

Product Line Pricing

Product line pricing is the pricing of different products within the same product range at different price
points. An example would be a laptop manufacturer offering different laptops with different features at
different prices. Product line pricing, therefore, is a pricing strategy that uses differing versions of one
product. Another example would be a car model that has various model types that change with
performance and quality. This pricing process relates to the customer’s perception of value, the cost of
production and other elements of cost and demand.

Tasks
1. Provide an example of a product/service/company that fits into each of the pricing strategies.

Write these answers directly into your assignment document.

2. Which pricing strategy does Emirates use? Why do you think this is the one that they use?

3. Which pricing strategy does your second company use? Explain why you think this.

Optional Product Pricing

This is a strategy that companies use to gain extra money. A product/service might be low and seem to
be a good deal, however, options can be added to the initial purchase that mean the product/service is
not as cheap as it initially appears to be. An example of this is a low cost airline, such as Ryanair. You
might be able to find a Ryanair flight for less than 5GBP, however, if you wish to take a suitcase for the
hold, this might cost an additional 35GBP each way, meaning that your round trip, with luggage might
cost 75GBP, not the initial 5GBP that you saw advertised.

Task: Provide an example of a product/service/company that has optional product pricing.