30 October 2021
As the name suggests, premium pricing sets the asking price at the top end of the market. It is most often used for luxury or exclusive brands.
Premium pricing is as much a positioning strategy as it is a pricing strategy as it seeks to signal to the potential customer that the product/service is of high quality or high desirability as evidenced by its high price.
As a broad generalization there are 3 types of consumer...
- Customers who MUST buy at the lowest price. These customers spend above average time seeking and comparing pricing and negotiating with potential vendors until they are satisfied that they have paid the lowest price possible. This is a business mindset that comes either from obsessing about the possibility of being ripped-off or the business owner who has the ingrained idea that controlling cost is the key to business success.
- Customers who routinely pay the highest price. Their belief is that price indicates quality and/or signals to their peers that they have the financial capacity to afford the best. For some it is prestige driven other times it is simply expedient. Expedience means avoiding the time impost of comparing offerings and simply paying the highest price because that is likley to ensure quality.
- However, the majority of buyers are value-for-money driven; happy to pay more if they are convinced that it means they will receive additional value that will suit their purpose and budget. Often this group of buyers will end-up buying the alternative that is neither the highest or lowest but somewhere in the middle of the price range.
We refer to this model as a generalization because, the lines between each are blurred and consumers can exhibit all three types of behaviors depending on product and circumstance. However, I think we all know people (and organizations) who fit each category fairly well.
Premium products are also likely to sell at lower volumes and therefore each unit sold needs to absorb a high proportion of up-front development costs. This also contributes to the higher price.
However, the premium pricing strategy is not a cost plus pricing strategy. That is, the higher price is not only because the product or service costs more to produce, it is a strategy that seeks to create higher profit margins through positioning the product as prestige more through style than substance. It is a strategy that is designed to target the second type of consumer listed above "customers who routinely pay the highest price."
It should be noted however, some premium products are sold at close to breakeven or even at a loss where they lift the desirability and brand perception of a stable of lower priced products in a brand-family. This is a strategy sometimes used in the wine industry where the top-of-the-range prize winning wine lifts the high volume end of the range. It has been used in the car industry as well, where a marque invests in a high performance top of the range limited edition model to lift the brand perception of their entire range.
Motor vehicles generally are available in a number variants: The base model (usually so basic nobody can bring themselves to buy it -not without at least adding alloy wheels), the more acceptable G, the GX, the GXL, the Sport and then the top of the range - let's call it "The Director." Typically, the top of the range model has additional bells and whistles that cost far less than the higher price suggests and the main differences are either cosmetic or cost effective enhancements like considerable sound damping to make the car feel more luxurious. The top of the range model is often promoted with a heavy emphasis on prestige and success.
The key features of the premium pricing strategy are:
- Generally, premium pricing is associated with some form of exclusivity or prestige. However, this exclusivity can also be based on uniqueness, pedigree or scarcity.
- Celebrity association/endorsement is sometimes used to add credibility to the premium claim.
- Association with a high-profile brand. Two identical T-Shirts - the $10 one has no-brand the $100 T-shirt has Gucci on it.
- To maintain the quality or prestigious image - high end graphic design and production values are used in all aspects of the packaging, promotion, sales environment, and service of the premium product.
Like all aspects of marketing, the premium pricing strategy is only likely to be successful if...
- Whatever makes it "premium" is valued by the target customer
- Generally, premium priced products are actually superior (although most of the superiority is perceived)
- The stylistic elements of the whole product concept (which includes the buying experience, the packaging, the delivery, after sales service, and not just the product itself) are well executed.
Other pricing strategies:
Pricing strategy overview: