Question

Given that higher-priced products are often perceived as being higher in quality, what implications does a low price have for marketers using promotional pricing strategies?

Answer 1

When a company introduces a new product, the marketing manager has to decide how to position the product in the marketplace and which pricing strategy to use. The choice depends on many factors: the target demographic, the price point of the product, its psychological image, and the amount of money budgeted to promote the product.

One strategy might be to use a low price initially to penetrate a market and get an early foothold. At the other end of the price spectrum, a company could use a premium pricing strategy to establish its product as a high-quality product in the minds of consumers.

Premium Pricing

Companies use a premium pricing strategy when they want to charge higher prices than their competitors for their products. The goal is to create the perception that the products must have a higher value than competing products because the prices are higher. The company is betting that the consumer will not investigate to find out if the product is truly a higher-quality item. Marketing managers want consumers to believe that the brand name by itself is enough to assure them that the product is better than the competition's product.

A premium pricing strategy has the advantages of producing higher profit margins, creating tougher barriers to entry for competitors, and increasing the brand's value for all the company's products.

Premium Pricing Examples

Rolex is a good example of a company using a premium pricing strategy to great success. If all you want is a watch to tell time, you can buy a Timex for $28. The Timex may even have more bells and whistles than the Rolex, but consumers are willing to pay $10,000 for the Rolex because they perceive the product to be extremely high quality, and it is an ultimate status symbol.

A Honda, costing around $25,000, is reliable and will get you from Point A to Point B at a reasonable cost. However, some consumers would rather make the trip in a Bentley, and they're willing to pay more for it. The Bentley costs around $250,000, but the owner believes that it is a high-quality car and is certainly more of a status symbol than a Honda Accord.

When to Use Premium Pricing

Premium pricing is most effective in the following situations:

• Early introduction: Premium pricing can be most effectively established when a product is first introduced to the market.
• Uniqueness: Small businesses that have unique products can differentiate their merchandise with higher prices and a quality image.
• Luxury products: Consumers perceive that the product is a luxury product and has exceptionally high quality or exclusive design.
• Strong barriers to entry: If a company has spent a large amount of money to establish its merchandise as premium products, then competitors would have to spend considerable sums of money to position their products in the same class.
• Limited production: The seller can create exclusivity by limiting the number of products available in the marketplace.
• No substitutes: Companies can make it difficult for competitors to copy their products by taking strong legal steps whenever similar products appear.
• Patents: Having a patent or copyright on a design or some other unique feature of a product is a forceful deterrent to other competitors who might want to offer similar products.

How to Establish Premium Pricing

• Identify the features that are considered high-end and highlight those elements in your marketing, the decor of the store, and in the dress code of the employees.
• Explain the value to the customer and demonstrate why it's worth the extra money.
• Go the extra mile. Find something extra in the product to offer customers.
• Don't sacrifice price. If necessary, reduce prices a little for long-time customers.
• Project financial stability. Customers want to know that the company will be around for a long time. It's part of the value image.

While it's natural to focus on and point out the weaknesses of the competition, companies have more success with premium pricing when they concentrate on creating value that makes their products worth the higher prices. Establishing a product with a high-priced image takes time, money and the efforts of everyone in the business. The entire marketing program must project high quality, and the consumer must be convinced that the product is worth every penny.

Lowering the price of a product to stimulate sales is a conventional strategy employed in every area of sales, but simply announcing the price drop may not be enough and can even have a negative effect if buyers perceive the price drop as a reflection of the product's true value. Appropriate discount pricing strategies dispel this idea and introduce the idea of a limited price drop for buyers who respond quickly. A related strategy is to pitch the product as something that will only be available for a short time.

Discount Pricing for Product Introductions

No single discount pricing strategy works best in every situation. The strategy you employ rises from the particular product – especially its relevance to the market and its sales history.

One reason for offering a discount is to make a new product introduction into an event. The underlying strategy here is to announce a new product along with a special discount offer good for either a limited time or for a limited number of customers. This strategy calls attention to a new product by offering a lower price to those who respond fastest.

Ad copy for this kind of promotion needs to demonstrate that you or your company is excited about the product. You can even make a virtue out of the difficulty of getting something new into a crowded marketplace by acknowledging the difficulty and offering the discount because you feel strongly that this is a product that deserves particular recognition.

"When my lead product developer brought X to me, I felt the kind of excitement you feel only a few times in your life as a marketer. Wow!"

Then, you explain why it's so great and, optionally, acknowledge how difficult it is to call attention to a product that is superior and innovative in a marketplace where these claims are common. The pitch concludes:

"That's when I decided that for our first 500 sales I was going to lower the price almost to our breaking point. For these first sales, the last thing I'm interested in is a profit. What I want to do is get it in your hands as fast as possible because when you understand what you've got, you're going to start talking about it to your friends. When they start buying, they'll tell their friends – and at that point, I'll raise the price to a point where we're not going to go broke!"

Pricing Strategies for a Product With Declining Sales

When you have a product with a long sales history that's suffering from declining sales, there are at least two good strategies to revive sales. The first works when the decline has to do with increased competition over price with competing products. Drop the price, of course, but the drop will either stimulate sales or have no great effect, depending on how you pitch it. One way is to call attention to your problem:

"Frankly, we're dropping our price to compete with competitors who've seen our success and entered the market with a cheaper product. I'd like to get X into the hands of new buyers who can then see the difference between X and our imitators. This price won't last forever, but for a limited time I'm going to not only meet but beat the low prices of our imitators."

The other approach is appropriate when a product is approaching the end of its sales cycle. That's when your approach is "Buy now before it's gone forever."