Sellers used to set the price for a product or service based on a manual analysis of the cost, demand, supply or competition. Without sophisticated algorithms, two pricing strategies were common:
- Premium Pricing: Premium pricing is where companies set the price higher than average competitive price. The key factor for the success of this strategy is differentiation. Premium pricing effectively works when the product has a unique feature that differentiates it from similar products in the market and has a competitive advantage.
- Penetration Pricing: Penetration pricing is basically setting the price relatively lower than the market competition. Companies use this pricing strategy to raise brand awareness and increase customer loyalty. Initially, penetration pricing may cause revenue loss but the main goal of this strategy is market penetration.
Profit maximization is not always possible with both strategies. At premium price level, demand would be low. Even if you have a high demand for penetration pricing, the price will remain low. What if you can cover all the price segments and respond faster to demand fluctuations in the market? This is possible with dynamic pricing.