Premium Pricing Strategy

The premium pricing strategy involves a company setting a price for its products that exceeds similar products offered by competitors.

Type	Description	Example	Advantage	Drawback
Price Skimming	Setting a high initial price for a new product or service and gradually lowering it over time.	– Apple’s pricing strategy for new iPhone models. – Gaming consoles like PlayStation and Xbox.	– Captures maximum profit from early adopters. – Creates an image of exclusivity and innovation.	– Limits market penetration. – Can lead to customer resentment when prices drop.
Price Leadership	Setting prices higher than competitors to convey superior quality or status.	– Luxury car brands like Mercedes-Benz. – High-end fashion brands like Gucci.	– Enhances brand image and perceived value. – Allows for higher profit margins.	– May alienate price-sensitive customers. – Requires consistent quality and image maintenance.
Product Line Pricing	Offering a range of products within a product line, with each having a distinct price point.	– Samsung’s Galaxy smartphone series (e.g., S series, Note series). – Starbucks coffee menu with different pricing tiers.	– Attracts a broader customer base. – Maximizes revenue by catering to different segments.	– Can lead to internal cannibalization. – Requires effective marketing to differentiate products.
Captive Product Pricing	Setting a low price for a core product and charging a premium for related complementary products or services.	– Printers (low-priced) and ink cartridges (high-priced). – Video game consoles and game titles.	– Attracts customers with lower entry costs. – Generates recurring revenue from complementary items.	– May lead to customer dissatisfaction with high ancillary costs. – Competition may offer more cost-effective alternatives.
Bundle Pricing	Offering multiple products or services as a package at a lower combined price than if purchased individually.	– Cable TV and internet bundles. – Fast food combo meals.	– Encourages customers to purchase more. – Simplifies purchasing decisions.	– Customers may buy unwanted items to get the bundle discount. – Potential loss of revenue if customers only want one item.
Value-Based Pricing	Pricing based on the perceived value a product or service offers to customers rather than production costs.	– Apple’s pricing for its premium MacBook Pro laptops. – Luxury spa treatments based on perceived relaxation value.	– Maximizes profit by aligning with customer willingness to pay. – Reflects product/service quality and uniqueness.	– Requires understanding of customer perceptions and preferences. – Difficult to apply in highly competitive markets.
Psychological Pricing	Using pricing strategies that consider psychological factors to influence consumer perception.	– Setting prices at $9.99 instead of $10.00. – Offering a “Buy One, Get One Free” promotion.	– Creates a perception of affordability. – Encourages impulse buying.	– May not work for high-end or luxury products. – Customers may become immune to such tactics.

Table of Contents

Understanding premium pricing strategies

Premium pricing strategies are used to elevate the perception of a brand or product among consumers.

To justify a price that exceeds those of competitor products, marketers aim to illustrate the quality of a product or the experience associated with using it.

Whether or not the product is indeed superior to the competition depends on the situation and is sometimes hotly debated.

Boutique carmakers who sell handmade cars using only the finest materials have an obvious quality advantage over a vehicle manufactured on an assembly line.

But in cases where the difference between the premium product and its cheaper equivalent is less obvious, businesses employ a coordinated marketing strategy to give an impression of quality.

Premium pricing strategies tend to work best when:

Customers perceive the item to be “luxurious” in quality or design.
Strong barriers to entry exist. For instance, the company may possess a large marketing budget, a brand reputation for durability, or an unbeatable warranty policy.
The amount of product sold is restricted either intentionally or otherwise. This taps into the scarcity heuristic where consumers attribute more value to rarer products.
There are no equivalent product substitutes.
The product or its technology is protected by patents and other intellectual property.

Premium pricing strategy examples

Here are a few examples of companies that use the premium price strategy.

Salesforce

Salesforce is one of many SaaS companies that uses premium prices to its advantage.

Prices for the company’s sales cloud software from $25 per user per month under the Essentials plan to $300 per user under the Unlimited plan.

The latter is a premium product because the company makes the differences between it and cheaper plans obvious.

Salesforce also utilizes free trial periods on all its plans to build the sort of brand equity that the premium pricing strategy relies on.

Apple

When the iPhone was first released, Apple could charge a premium price because it owned the technology and was the only smartphone producer on the market.

Despite new entrants in recent years reducing the company’s total addressable market, Apple continues to sell its products for a premium.

When raving fans camp overnight or queue in the street for a new release, one can appreciate that Apple’s premium pricing strategy is driven by more than quality or innovative technology.

Indeed, superior brand equity also drives premium prices.

In other words, the ability to enjoy everything from the sleek and intuitive design of the product to the experience of visiting an Apple Store and receiving excellent customer support.

Nespresso

Nespresso’s premium pricing strategy is based on its first-mover advantage in the coffee cup industry. Like Apple, Nespresso’s brick-and-mortar stores are experiences in themselves.

With most consumers associating the purchase of coffee with a bland supermarket, the company designed its stores to look more like those of a luxury fashion retailer.

This brand equity is reinforced by the Nespresso Club, a personalized members-only service offering expert advice from coffee specialists, coffee machine troubleshooting, and free delivery, among other perks.

Other Case Studies

Rolex Watches: Rolex is a renowned luxury watch brand known for its premium pricing. Their watches are often priced significantly higher than other watch brands in the market. Rolex has built a reputation for precision, craftsmanship, and exclusivity.
Tesla Electric Cars: Tesla, an electric car manufacturer, is known for its premium pricing strategy. Tesla’s electric vehicles are priced higher than many traditional gasoline-powered cars, but they offer cutting-edge technology, longer driving ranges, and a commitment to sustainability.
Louis Vuitton Handbags: Louis Vuitton, a high-end fashion brand, offers premium-priced handbags and accessories. The brand’s products are associated with luxury, high-quality materials, and distinctive design, which justifies their premium prices.
Bang & Olufsen Audio Equipment: Bang & Olufsen manufactures premium audio and home entertainment equipment. Their products, such as high-end speakers and headphones, are known for their exceptional sound quality and sleek design, commanding premium prices in the market.
Four Seasons Hotels and Resorts: The Four Seasons chain of hotels and resorts is known for its luxury and premium pricing. They offer top-notch service, luxurious accommodations, and exclusive amenities, positioning themselves as a premium hospitality brand.
Château Margaux Wine: Château Margaux is a prestigious winery in Bordeaux, France, known for producing premium-priced wines. Their wines are highly regarded for their quality, aging potential, and rarity in the wine market.
Bentley Luxury Cars: Bentley is a manufacturer of high-end luxury automobiles. Their cars are known for their craftsmanship, attention to detail, and advanced features, which contribute to their premium pricing.
Tiffany & Co. Jewelry: Tiffany & Co. is a renowned jewelry brand known for its premium-priced engagement rings, necklaces, and other fine jewelry. Their products are associated with quality, elegance, and timeless design.
Aman Resorts: Aman Resorts is a luxury hotel and resort chain with properties in exotic locations around the world. They offer premium accommodations, personalized services, and a tranquil atmosphere, commanding premium rates.
Dyson Vacuum Cleaners: Dyson manufactures premium vacuum cleaners known for their innovative technology, superior suction power, and sleek design. Their products are often priced higher than standard vacuum cleaners in the market.

Key takeaways

The premium pricing strategy involves a company setting a price for its products that exceeds similar products offered by competitors.
Premium pricing strategies tend to work best when there is a general perception of luxury among consumers. They also work well when the number of products is limited or when there are patents or IP in place.
Proponents of the premium pricing strategy include Salesforce, Apple, and Nespresso, with the latter two relying on high brand equity to sell their products at premium prices.

Key Highlights:

Premium Pricing Strategy:
- Premium pricing strategy involves setting a price for products that exceeds competitors’ prices, with the aim of elevating the brand’s perception among consumers.
- This strategy is used to justify higher prices by emphasizing product quality or the overall experience associated with the product.
Factors Affecting Premium Pricing Strategy:
- Premium pricing works best when customers perceive the product as luxurious, and strong barriers to entry exist.
- Limited availability or scarcity of the product, absence of equivalent substitutes, and protection through patents or intellectual property also contribute to the success of premium pricing.
Examples of Companies Using Premium Pricing:
- Salesforce: Offers various plans for its sales cloud software, with different price points based on features. Utilizes free trial periods to build brand equity.
- Apple: Known for its premium pricing strategy, initially driven by its technological advantage and unique product offerings like the iPhone. High brand equity and customer experience also contribute.
- Nespresso: Utilizes a premium pricing strategy by offering a first-mover advantage in the coffee cup industry. Creates an experience with its brick-and-mortar stores and personalized services like the Nespresso Club.

Case Study	Strategy	Outcome
Apple	Premium Pricing: Set high prices for products like iPhones, MacBooks, and Apple Watches to emphasize quality and exclusivity.	Maintained a strong premium brand image, driving high customer loyalty and profitability.
Tesla	Premium Pricing: Priced vehicles like the Model S and Model X at a premium to emphasize innovation, performance, and luxury.	Enhanced brand perception as a leader in innovation and sustainability, driving strong sales growth.
Rolex	Premium Pricing: Set high prices for watches to convey exclusivity, craftsmanship, and status.	Built a prestigious brand reputation, maintaining strong demand and high profit margins.
Louis Vuitton	Premium Pricing: Priced handbags, clothing, and accessories at a premium to convey exclusivity and quality.	Maintained a strong luxury brand image, attracting high-end consumers and driving significant revenue.
BMW	Premium Pricing: Priced vehicles at a premium to emphasize performance, quality, and status.	Built a loyal customer base, maintaining high sales and strong brand equity.
Chanel	Premium Pricing: Set high prices for fashion items, perfumes, and cosmetics to convey exclusivity and elegance.	Enhanced brand prestige, driving strong demand and high profit margins.
Hermès	Premium Pricing: Priced products like the Birkin bag at extremely high levels to emphasize rarity and exclusivity.	Created a highly prestigious brand image, maintaining high demand and significant profitability.
Montblanc	Premium Pricing: Set high prices for pens and accessories to convey craftsmanship and exclusivity.	Built a prestigious brand reputation, driving strong sales and high profit margins.
Gucci	Premium Pricing: Priced clothing, accessories, and footwear at a premium to convey fashion-forward luxury.	Maintained strong brand prestige, attracting high-end consumers and driving significant revenue growth.
Ferrari	Premium Pricing: Priced vehicles at a premium to convey performance, exclusivity, and status.	Built a loyal and affluent customer base, maintaining strong demand and high profit margins.
Prada	Premium Pricing: Priced fashion items, handbags, and accessories at a premium to emphasize quality and exclusivity.	Maintained a strong luxury brand image, attracting high-end consumers and driving significant revenue.
Cartier	Premium Pricing: Set high prices for jewelry and watches to convey craftsmanship and exclusivity.	Built a prestigious brand reputation, maintaining strong demand and high profit margins.
Lamborghini	Premium Pricing: Priced vehicles at a premium to emphasize performance, rarity, and exclusivity.	Created a highly prestigious brand image, attracting affluent consumers and driving strong sales growth.
Burberry	Premium Pricing: Set high prices for clothing, accessories, and fragrances to convey heritage and exclusivity.	Maintained a strong luxury brand image, attracting high-end consumers and driving significant revenue growth.
Ralph Lauren	Premium Pricing: Priced clothing, home decor, and accessories at a premium to convey quality and sophistication.	Built a prestigious brand reputation, maintaining strong demand and high profit margins.
Aston Martin	Premium Pricing: Set high prices for sports cars to convey performance, craftsmanship, and exclusivity.	Built a prestigious brand reputation, attracting affluent consumers and maintaining high profit margins.
Omega	Premium Pricing: Priced watches at a premium to emphasize precision, craftsmanship, and exclusivity.	Built a strong luxury brand image, maintaining high demand and significant profitability.
Giorgio Armani	Premium Pricing: Set high prices for clothing, accessories, and fragrances to convey elegance and exclusivity.	Enhanced brand prestige, driving strong demand and high profit margins.
Bang & Olufsen	Premium Pricing: Priced products at a premium to emphasize quality, design, and exclusivity.	Built a prestigious brand reputation, attracting discerning consumers and driving significant revenue growth.
Tiffany & Co.	Premium Pricing: Set high prices for jewelry to convey craftsmanship, heritage, and exclusivity.	Maintained a prestigious brand image, attracting affluent consumers and driving high sales and profitability.

Expanded Pricing Strategies Explorer

Pricing Strategy	Description	Key Insights
Cost-Plus Pricing	Markup added to production cost for profit	Ensures costs are covered and provides a predictable profit margin.
Value-Based Pricing	Prices set based on perceived customer value	Aligns prices with what customers are willing to pay for the product or service.
Competitive Pricing	Pricing in line with competitors or undercutting	Helps maintain competitiveness and market share.
Dynamic Pricing	Prices adjusted based on real-time demand	Maximizes revenue by responding to changing market conditions.
Penetration Pricing	Low initial prices to gain market share	Attracts price-sensitive customers and establishes brand presence.
Price Skimming	High initial prices gradually lowered	Capitalizes on early adopters’ willingness to pay a premium.
Bundle Pricing	Multiple products or services as a package	Increases the perceived value and encourages upselling.
Psychological Pricing	Pricing strategies based on psychology	Leverages pricing cues like $9.99 instead of $10 for perceived savings.
Freemium Pricing	Free basic version with premium paid features	Attracts a wide user base and converts some to paying customers.
Subscription Pricing	Recurring fee for ongoing access or service	Creates predictable revenue and fosters customer loyalty.
Skimming and Scanning	Continually adjusting prices based on market dynamics	Adapts to changing market conditions and optimizes pricing.
Promotional Pricing	Temporarily lowering prices for promotions	Encourages short-term purchases and boosts sales volume.
Geographic Pricing	Adjusting prices based on geographic location	Accounts for variations in cost of living and local demand.
Anchor Pricing	High initial price as a reference point	Influences perception of value and makes other options seem more affordable.
Odd-Even Pricing	Prices just below round numbers (e.g., $19.99)	Creates a perception of lower cost and encourages purchases.
Loss Leader Pricing	Offering a product below cost to attract customers	Drives traffic and encourages additional purchases.
Prestige Pricing	High prices to convey exclusivity and quality	Appeals to premium or luxury markets and enhances brand image.
Value-Based Bundling	Combining complementary products for value	Encourages customers to buy more while receiving a perceived discount.
Decoy Pricing	Less attractive third option to influence choice	Guides customers toward a preferred option.
Pay What You Want (PWYW)	Customers choose the price they want to pay	Promotes customer goodwill and can lead to higher payments.
Dynamic Bundle Pricing	Prices for bundled products based on customer choices	Tailors bundles to customer preferences.
Segmented Pricing	Different prices for the same product by segments	Considers diverse customer groups and willingness to pay.
Target Pricing	Prices set based on a specific target margin	Ensures profitability based on specific financial goals.
Loss Aversion Pricing	Emphasizes potential losses averted by purchase	Encourages decision-making by highlighting potential losses.
Membership Pricing	Exclusive pricing for members of loyalty programs	Fosters customer loyalty and membership growth.
Seasonal Pricing	Price adjustments based on seasonal demand	Matches pricing to fluctuations in consumer behavior.
FOMO Pricing (Fear of Missing Out)	Limited-time discounts or deals	Creates urgency and encourages purchases.
Predatory Pricing	Low prices to deter competitors or drive them out	Strategic pricing to gain market dominance.
Price Discrimination	Different prices to different customer segments	Capitalizes on varying willingness to pay.
Price Lining	Different versions of a product at different prices	Catering to various customer preferences.
Quantity Discount	Discounts for bulk or volume purchases	Encourages larger orders and repeat business.
Early Bird Pricing	Lower prices for early adopters or advance buyers	Rewards early commitment and generates initial sales.
Late Payment Penalties	Additional fees for late payments	Encourages timely payments and revenue collection.
Bait-and-Switch Pricing	Attracting with a low-priced item, then upselling	Uses attractive deals to lure customers to higher-priced options.
Group Buying Discounts	Discounts for purchases made by a group or community	Encourages collective buying and customer loyalty.
Lease or Rent-to-Own Pricing	Lease with an option to purchase later	Provides flexibility and ownership choice for customers.
Bid Pricing	Customers bid on products or services	Prices determined by customer demand and willingness to pay.
Quantity Surcharge	Charging a fee for purchasing below a certain quantity	Encourages larger orders and higher sales.
Referral Pricing	Discounts or incentives for customer referrals	Leverages word-of-mouth marketing and customer networks.
Tiered Pricing	Multiple price levels based on features or benefits	Appeals to customers with varying needs and budgets.
Charity Pricing	Donating a portion of sales to a charitable cause	Aligns with corporate social responsibility and attracts conscious consumers.
Behavioral Pricing	Price adjustments based on customer behavior	Customizes pricing based on customer interactions and preferences.
Mystery Pricing	Prices hidden until the product is added to the cart	Encourages customer engagement and commitment.
Variable Cost Pricing	Prices adjusted based on variable production costs	Reflects cost changes and maintains profitability.
Demand-Based Pricing	Prices set based on demand patterns and peak periods	Maximizes revenue during high-demand periods.
Cost Leadership Pricing	Competing by offering the lowest prices in the market	Focuses on cost efficiencies and price competitiveness.
Asset Utilization Pricing	Pricing based on the utilization of assets	Optimizes revenue for assets like rental cars or hotel rooms.
Markup Pricing	Fixed percentage or dollar amount added as profit	Ensures consistent profit margins on products.
Value Pricing	Premium pricing for products with unique value	Attracts customers willing to pay more for exceptional features.
Sustainable Pricing	Pricing emphasizes environmental or ethical considerations	Appeals to conscious consumers and supports sustainability goals.

Connected Business Concepts

Revenue Modeling

Revenue model patterns are a way for companies to monetize their business models. A revenue model pattern is a crucial building block of a business model because it informs how the company will generate short-term financial resources to invest back into the business. Thus, the way a company makes money will also influence its overall business model.

Pricing Strategies

A pricing strategy or model helps companies find the pricing formula in fit with their business models. Thus aligning the customer needs with the product type while trying to enable profitability for the company. A good pricing strategy aligns the customer with the company’s long term financial sustainability to build a solid business model.

Dynamic Pricing

Price Sensitivity

Price sensitivity can be explained using the price elasticity of demand, a concept in economics that measures the variation in product demand as the price of the product itself varies. In consumer behavior, price sensitivity describes and measures fluctuations in product demand as the price of that product changes.

Price Ceiling

A price ceiling is a price control or limit on how high a price can be charged for a product, service, or commodity. Price ceilings are limits imposed on the price of a product, service, or commodity to protect consumers from prohibitively expensive items. These limits are usually imposed by the government but can also be set in the resale price maintenance (RPM) agreement between a product manufacturer and its distributors.

Price Elasticity

Price elasticity measures the responsiveness of the quantity demanded or supplied of a good to a change in its price. It can be described as elastic, where consumers are responsive to price changes, or inelastic, where consumers are less responsive to price changes. Price elasticity, therefore, is a measure of how consumers react to the price of products and services.

Economies of Scale

In Economics, Economies of Scale is a theory for which, as companies grow, they gain cost advantages. More precisely, companies manage to benefit from these cost advantages as they grow, due to increased efficiency in production. Thus, as companies scale and increase production, a subsequent decrease in the costs associated with it will help the organization scale further.

Diseconomies of Scale

In Economics, a Diseconomy of Scale happens when a company has grown so large that its costs per unit will start to increase. Thus, losing the benefits of scale. That can happen due to several factors arising as a company scales. From coordination issues to management inefficiencies and lack of proper communication flows.

Network Effects

A network effect is a phenomenon in which as more people or users join a platform, the more the value of the service offered by the platform improves for those joining afterward.

Negative Network Effects

In a negative network effect as the network grows in usage or scale, the value of the platform might shrink. In platform business models network effects help the platform become more valuable for the next user joining. In negative network effects (congestion or pollution) reduce the value of the platform for the next user joining.

Premium Pricing

The premium pricing strategy involves a company setting a price for its products that exceeds similar products offered by competitors.

Price Skimming

Price skimming is primarily used to maximize profits when a new product or service is released. Price skimming is a product pricing strategy where a company charges the highest initial price a customer is willing to pay and then lowers the price over time.

Productized Services

Productized services are services that are sold with clearly defined parameters and pricing. In short, that is about taking any product and transforming it into a service. This trend has been strong as the subscription-based economy developed.

Menu Costs

Menu costs describe any cost that a business must absorb when it decides to change its prices. The term itself references restaurants that must incur the cost of reprinting their menus every time they want to increase the price of an item. In an economic context, menu costs are expenses that are incurred whenever a business decides to change its prices.

Price Floor

A price floor is a control placed on a good, service, or commodity to stop its price from falling below a certain limit. Therefore, a price floor is the lowest legal price a good, service, or commodity can sell for in the market. One of the best-known examples of a price floor is the minimum wage, a control set by the government to ensure employees receive an income that affords them a basic standard of living.

Predatory Pricing

Predatory pricing is the act of setting prices low to eliminate competition. Industry dominant firms use predatory pricing to undercut the prices of their competitors to the point where they are making a loss in the short term. Predatory prices help incumbents keep a monopolistic position, by forcing new entrants out of the market.

Bye-Now Effect

The bye-now effect describes the tendency for consumers to think of the word “buy” when they read the word “bye”. In a study that tracked diners at a name-your-own-price restaurant, each diner was asked to read one of two phrases before ordering their meal. The first phrase, “so long”, resulted in diners paying an average of $32 per meal. But when diners recited the phrase “bye bye” before ordering, the average price per meal rose to $45.

Anchoring Effect

The anchoring effect describes the human tendency to rely on an initial piece of information (the “anchor”) to make subsequent judgments or decisions. Price anchoring, then, is the process of establishing a price point that customers can reference when making a buying decision.

Pricing Setter

A price maker is a player who sets the price, independently from what the market does. The price setter is the firm with the influence, market power, and differentiation to be able to set the price for the whole market, thus charging more and yet still driving substantial sales without losing market shares.

Read Next: Pricing Strategy.

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