What is Premium Pricing Strategy?

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. The premium price strategy lies at the other end of the spectrum and sets a high price for the product.

Tip

A company could use a premium pricing strategy to establish its product as a high-quality product in the minds of consumers.

What is 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.