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What is Premium Pricing?
Premium pricing is a pricing strategy directed at charging higher prices in comparison to competitors. The key objective of premium pricing is to create a particular vision or perception of a product correlating to its potential higher value and other unique factors. Because of such elements, companies apply a premium pricing approach. Another important characteristic of premium pricing is that customers might even know whether there are objective reasons for setting higher prices. They merely believe in what a brand is doing.
In such a case, the premium price goes toe to toe with marketing approaches. Marketing experts employ strategies to make consumers believe that the brand name is worth being loyal to and that the company with such a reputation offers high-quality products. Essentially, premium pricing creates an impression or cultivates a sense of dominating the market that a particular company has value and quality corresponding to the price tag.
Premium pricing correlates to price skimming. However, in contrast to price skimming, premium pricing includes setting higher prices and keeping them there for a long time. Premium pricing is often associated with luxury brands.
Pros and Cons of Premium Pricing
There are particular advantages and disadvantages of premium pricing. Like all the pricing strategies directed at boosting prices, a demanding approach comes with the method. Yet, starting with the pros of premium pricing, one should examine the following:
- Higher profits. When done properly, premium pricing leads to higher profit margins. If a company succeeds in setting the higher price with reasonable factors behind it, it will increase profits.
- Improved brand value.Premium pricing leads to a better company perception. If a business sets a proper vision of its products as being of high quality and value, there is a massive chance that consumers will perceive the company as worthy and will stay loyal to the brand.
- Raising barrier to entry. If a company has customer loyalty and good brand awareness, it would be harder for new entrants to enter the market and compete with a company engaging in premium pricing. Through a premium pricing strategy, it is possible to rapidly gain market advantage and set domination based on quality and value.
- Competitive advantage. When a company can benefit from higher prices, it gets a competitive advantage. Essentially, a business employing premium pricing gets customer loyalty, brand awareness, and higher profits. All these elements can be translated into a competitive advantage.
There are apparent advantages of premium pricing when it is used properly. However, one should also cover the disadvantages of the pricing strategy.
- High development costs. The premium pricing directly depends on a demand function and price elasticity. Essentially, suppose a company does not have a unique selling point and engages in premium pricing. It can face a higher distribution cost, which won’t be covered by profits received from the strategy.
- Lack of access to a mass market.Setting higher prices means that a company targets a particular pool of customers who can afford to pay a high price tag. The customer pool will be limited, and a business does not have access to a mass market, which translates into lower demand.
- Potential backfire. When a company is exposed to the market with numerous competitors, there are instances when premium pricing can backfire. For example, suppose a business sets a higher price for a high-quality product. There is a chance that some competitors may sell similar quality products for a lower price. It will be the moment when premium pricing backfires.
The pros and cons of premium pricing show that it all depends on the proper application of the strategy and understanding of the context. After a good market and competitors ' research, it is possible to get the most out of the pricing strategy.
When to Use Premium Pricing?
To get the most out of premium pricing, companies need to understand when to use it better. In such a case, certain preconditions need to be met to make the strategy advantageous rather than disadvantageous. At this point, to use premium pricing, it is crucial to consider the company’s reputation, existing demand, and marketing.
Setting higher prices is possible if there is demand for a product. There is sufficient condition for the strategy to exist when there is brand loyalty. Besides, if you intend to set a higher price, you need a strong marketing message to justify such a price. It is also known as building brand equity.
Premium pricing is a strategy revolving around setting a higher price for a product. The key prerequisite for such a strategy is the belief that the product with a higher price tag has correlating quality and value worth the price. There are particular pros and cons to the strategy. The case suggests that the strongest precondition for the premium pricing strategy to be advantageous is when a company understands the market, customers, and competition.
What is a premium pricing example?
When it comes to the example of the given pricing strategy, it is crucial to focus on Rolex. Because of its premium quality and unique brand, the customer of Rolex are willing to pay staggering price tags for the product.
Is premium pricing illegal?
While approaches like predatory pricing are illegal, namely because it creates monopolies, premium pricing is legal. Premium pricing is a strategy for forgetting higher prices based on objective factors.