Premium pricing is a strategy that company sets a high selling price comparing to the market. The company wants to express their superior quality compare to competitors.
The company expects that customers will value the product base on the selling price. It is also known as “image pricing” or “prestige pricing.” The target customers are willing to pay for premium price due to the unique features, and it makes them feel premium.
When we should use Premium Pricing.
The unique product
The company can use this price when the product is unique to the market. The competitors need some time to develop a similar product, and customers will not be able to find the substitute item.
The products are protected by copyright or patent
In the US, we have the strict law to protect the original idea from being stolen. It will be a barrier for competitors to copy our features and sell at a lower price. They need to spend time and money on R&D, design, production, and it will give us the time to be only one in the market.
It is a special kind of product which customers are going crazy for. It is not necessary but highly desired and associated with wealth or status. This kind of product is quickly increasing in price as it is very hard to judge the real value.
Limited quantity product
The company can make the product unique by limiting its quantity in order to boost demand. The best example is Supreme; they extremely limit the production of cloth, which makes customers really want the items.
Premium Pricing Example
A pair of Gucci shoes cost from $ 200 up to $2,000, while we can buy normal shoes from amazon with less than $ 50. The price is very far different for similar and substitute product.
It is costs only around $ 20,000 for the brand new Toyota car in the United States, it can drive us anywhere with the basic need. However, a similar feature car from Rolly Roy will cost up to $ 1 million or more. They show almost nothing different in terms of usability, feature, but the price makes them far different. The customers still prefer to drive Roll Roy even they charge a high rate for a car.
A regular watch which can tell the time cost below $ 100, there is plenty of branches we can select. However, customers are willing to pay up to $ 10,000 for the Rolex watch. Both watches can tell the same time, as the watch can do.
What are the Advantages of Premium Pricing?
|Advantages of Premium Pricing|
|Increasing brand value||The price increase will lead to high value as well. The product becomes exclusive, which everyone is not able to buy it. The price will become the enjoyment for their loyal customers, and the brand will keep increasing its value.|
|Differentiate from competitor||It is the primary key that makes our product different from others. It builds a perception that we may have higher quality.|
|High-profit margin||As a business, profit is one of the main objectives. With this kind of price, it will drive the company profit to the sky. When the company can set a very high price but still manage to sale, it will help to maximize the profit.|
|Build a high status in society||As we can see in the examples above, these products become a symbol of luxury. Their owner intends to show off to the others, and it looks like they provide free advertisement for company. In this social media era, people are posting hundred of Roll Roy, Gucci, Latest Apple products to Instagram, Facebook, and Snapchat.|
|Low operation cost||With a high price, the sale volume will be much less than a similar product at a low price, but we still make a good profit. Roll Roy sale only 3,000-4,000 cars per year while Toyota sale more than 2 million cars per year. We can see that by setting a high price, it will reduce the sale quantity as well as the operation. It will be more easy to control a small process and ensure that customers happy with our product.|
What are the Disadvantages of Premium Pricing?
|Disadvantages of Premium Pricing|
|High marketing expense||During the first entry, the company needs to spend a huge amount of marketing expenses to ensure that the target customers aware of product. It needs a higher budget to promote as the products are expensive. The company may need to consider hiring the superstar to be the brand ambassador for the product to launch it much quicker. It will increase costs more and more.|
|Limited product||This pricing strategy can only apply to some specific products. It is very hard to apply this strategy and get success.|
|Reduce in sale volume||For sure, the sales volume decrease when we increase our price, we will sacrifice the massive amount of customers as most of them are price sensitive. They will look for a cheap substitute product from our competitor. With less sale, we will produce less too, and there will be a missed opportunity for bulk discounts from suppliers.|
|Face with a hug competition||The competitors will keep an eye on us when we apply this method. If they see the beginning of our success, they will improve their product and sell at a lower margin, and it will be huge pressure for us. For example, the Smart Company, such as Huawei, Xiaomi, has put pressure on Apple by creating an innovative product at a lower price.|