Premium Pricing – Definition, Advantages And Disadvantages
Premium Pricing – A Façade Or Reality?
Premium pricing is a kind of tactic wherein a high selling price is set in accordance with other competitors. This can give the impression that the product is qualitative or superior compared to its competitors. This is what we call prestige or image pricing. Customers feel that the product is a premium one and unique and, thus, would be ready to pay the price for it.
When a company brings in a new product, the marketing team has the huge responsibility of planning how to position the product and what kind of pricing tactic to use. They consider several factors – the target customer, the price point, the psychological image, as well as the marketing budget. Some marketing teams might think that initially, a low price would work well so that the market can be penetrated. While on the other end of the scale, the marketing team might decide to set up a high premium price. Marketing teams expect consumers to consider that the brand by itself would be enough to show them that the product is better than others.
Such a tactic can bring in high-profit margins and create a tough barrier for competitor entry. It’ll also enhance the brand value.
Now, that you know what premium pricing is – let’s make it clearer with some examples –
- Rolex – Most of us think that Rolex is the ultimate watch and probably dream of owning one. Compare it with a Timex watch, which may cost you about £25, whereas a Rolex might cost a whopper of £10000 each. Whoever can afford it would surely go for a Rolex rather than a Timex, even though the functions of both watches are more or less the same. We just assume that the Rolex would give you better quality, long life. Oh Yes! It is a status symbol too.
- Try comparing a Honda and a Benz. Both cars give you pretty much the same functions of transportation and comfort. However, a Benz is believed to be more qualitative and handsome, not to mention the Ooh’s and Aah’s that come along with it.
When should you use Premium Pricing?
Premium pricing works well if the product is newly introduced in the market. It also is a good idea for small businesses when they have unique products to introduce, and they expect to differentiate their product with the right kind of image. With premium pricing, consumers naturally comprehend that the product is a luxury item and is maybe an exclusive design with high quality. The seller of such products can also create exclusivity of the product by limiting the numbers available in the market. They can also make it a little tough on competitors by taking some legal steps so that similar products do not appear in the market. Also, copyright or patent on the design or any unique feature makes it difficult for similar competitor products entering the market.
It’s natural to point towards the competition’s weak points. However, when a company takes up premium pricing, they should be concentrating on making their product worth that high price. The product genuinely needs money, time, and effort to make it worthwhile. Every tactic naturally has its pros and cons. So does premium pricing! Let’s take a look at them and then see for yourself whether it would suit your company or not –
Advantages –
- As we already saw, the increase in price can also increase brand value. Not all are able to afford or buy it, and thus it becomes exclusive. It can be enjoyed by loyal customers, and the brand value continues to increase.
- Premium pricing is the main key that makes the product different from competitors. It makes people think that the product is of high quality, even if it is not.
- Profit is naturally the main objective of any business. And such premium pricing tactics would take the company profits sky-high.
- We saw the above examples, and they’re pretty much self-explanatory how this entire scenario works. The customer mainly buys such products to show their status, and in turn, it becomes a free advertisement for the company. In fact, personal social media statuses of the customers indirectly help in ads for the company as well.
- This kind of tactic brings in low operating costs. Such products with high prices have a low sale volume as compared to similar products at lower prices. For example, Bentley would probably sell lesser cars as compared to Toyota. This ensures that the process and operation cost can also be reduced. It is easier to keep such a small process in control and keep the niche customers happy.
Disadvantages –
- The initial introduction of the product would need a large amount of marketing and expenses just to make the consumer aware of the product.
- Highly-priced products will need a higher marketing budget. This is exactly why some companies hire popular actors or sports personalities to endorse their products and be their brand ambassadors. When such faces represent the brand, people assume that the product is of high quality and deserves such prices. But this naturally increases costs for the company too.
- This kind of tactic can apply only to certain products. It can be quite difficult to attain success with this.
- An increase in prices brings down the sales volume. Not all customers can afford to buy such products. Most would look for cheaper substitutes. Thus, fewer sales volume, in turn, means lesser production too.
- Competitors can give back likewise. In a sense, that once they see success with the premium-priced product, they might just improve their own and sell at a lower price, which gives serious competition and pressure. For example – Apple devices are a unique product. But lately, brands like Xiaomi and Huawei have brought in similar innovative products at much lower prices.
It is quite natural to concentrate on the competition’s weaknesses. However, premium pricing can work well only if the product is made worth the price. The consumer will need to be convinced that the product is worth it.
