Premium Pricing

Updated on March 19, 2024
Article byAswathi Jayachandran
Edited byAswathi Jayachandran
Reviewed byDheeraj Vaidya, CFA, FRM

Premium Pricing Meaning

Premium pricing is an approach used by businesses to increase the perceived quality of products and build a luxury brand image by pricing them higher than the market average. When a company has a significant competitive advantage, such pricing tactics effectively make consumers assume quality and buy more.

How premium pricing works?

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Premium pricing is a marketing strategy that uses certain pricing strategies to influence people psychologically. It helps to promote positive perceptions based solely on price. Consumers assume that they are paying high prices for a valid reason since they believe that the product’s quality is already good.

Key Takeaways

  • Premium pricing is a pricing strategy employed by companies where a product or service’s price is intentionally set at a value higher than the average market value or competitor’s price.
  • An increase in value enhances the overall market presence by increasing the perceived quality of the product or service.
  • Price plays a significant role in how market economies operate by connecting the supply and demand of goods and services.
  • It aids in establishing the brand’s image and reputation as a high-end option.

Premium Pricing Strategy Explained

The premium pricing strategy is known as “image pricing” or “prestige pricing.” The purpose of it is to highlight the quality and experience associated with a product. A seller may set artificially high rates for a product or service in such cases to give the impression of a luxury brand. The price point is typically higher than the ordinary market value to establish a market perception that generates more money as revenue.

A firm’s product or service’s relative price is a function of the business’s reputation for quality. Three major marketing mix variables influence the quality. They are the product quality, customer service, and marketing communication inputs. While relative market share, market entry, and consumer base numbers are small, the firm must manage all these to obtain the perfect premium price. Premium pricing policy should be flexible, and companies that cannot determine the appropriate price for their goods in light of their worth would have it tough competing with their rivals.

Companies should focus on their USP (unique selling proposition) to select a premium pricing policy. The marketing tactic of building consumer awareness about how one’s brand or product is superior to rivals’ is the base of forming a “unique selling proposition” (USP). It shall be promoted in addition to its other values and is known as the unique value proposition (UVP).

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Check out these premium pricing examples to get a better idea of the premium pricing strategy:

Example #1

Rolex, a watch manufacturer based in Geneva, Switzerland, is known for its products of exquisite designs and superior product value. Watches serve the sole purpose of knowing the time. Even a $1 look will do the job. However, Rolex has achieved a prominent market position and profits owing to its loyal customer base and the quality of materials used in manufacturing. The fact that time, watches have become a part of style ensembles rather than a simple device of utility has also been a booster in the success of companies like Rolex.

Example #2

In the early days, when electronics firm Apple Inc. controlled the smartphone market, iPhones were marketed at a premium price, and all retailers quickly ran out of supply.

Despite still charging premium rates, today’s Apple products don’t have any cutting-edge innovative technology or designs. Compared to the time of the iPhone’s initial release, Apple has a much smaller audience, yet they are still willing to pay more for this iconic brand. This is because they make their products feel luxurious and are priced based on how consumers perceive the brand’s value.

Advantages And Disadvantages

Given below are a few advantages of premium pricing:

  1. High-profit margins – When high-priced units are sold, the profit on those units also rises. For example, two units sold of a $20,000 product will give $40,000 faster than selling 2000 products at $20 to attain that level of sales.
  2. Brand perception and value – There is a connection between prestige cost and brand value. While brands with strong brand values can only use prestige pricing, the value of those brands is increased by prestige pricing.
  3. Competitiveness – Selling products at a high price may involve incurring huge advertising costs. In such a case, it might be very challenging for a rival to provide a similar product at the same price without making a significant marketing investment.
Advantages and Disadvantages of Premium Pricing

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Given below are a few disadvantages of premium pricing:

  1. Expensive branding – A premium pricing plan involves significant up-front and ongoing expenses that must be met for as long as the method is used. If not, consumers will stop recognizing the premium brand, and the business will struggle to keep its pricing points.
  2. Sales – A company’s ability to sell will be constrained to the top tier of the market if it opts to use a premium pricing strategy, which reduces the number of sales as a whole. This makes it challenging for businesses to seek strong sales growth while charging premium prices. However, if the corporations are pursuing the creamy layer in the new markets, the strategy can be used as long as the business expands into new geographic areas.
  3. Cost savings – The company’s strategy prevents it from achieving the cost savings that high-volume producers could obtain because it limits the company to low sales volume.

Frequently Asked Questions (FAQs)

1. What is premium pricing in business?

In business, a marketing strategy makes a product or service highly priced. It is to attract a wealthy and influential customer base. This reshapes the face of the business into one that is in the top tier. It also builds brand value and reputation.

2. What is premium pricing in the mortgage?

When a lender originates a loan with an interest rate for the borrower higher than the market, the lender will probably sell the loan for more than the par value. This is mainly due to the theory of demand and supply.

3. How to do premium pricing?

Analyzing the market with proper research, studying the competition, and building a product that is valuable and has a USP. It should possess standard quality. The work does not stop here. High-end brands need high-end marketing also for promotion. The premium pricing model developed should accommodate this factor.

4. What does premium pricing do?

The premium pricing model increases the revenue of the businesses. As a result, companies can get huge profit margins even with fewer sales volumes. In addition, it enhances the brand’s image as one that sells luxury products and services.

This article is a guide to Premium Pricing and its meaning. Here, we explain its strategy and advantages & disadvantages with examples. You can also go through our recommended articles on corporate finance –

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