The premium pricingstrategy involves a company setting a price for its products that exceeds similar products offered by competitors.
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 marketingstrategy 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.
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 pricingstrategy 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 pricingstrategy 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 pricingstrategy 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.
Key takeaways
The premium pricingstrategy 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 pricingstrategy include Salesforce, Apple, and Nespresso, with the latter two relying on high brand equity to sell their products at premium prices.
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 businessmodel.
A pricingstrategy 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 pricingstrategy aligns the customer with the company’s long term financial sustainability to build a solid businessmodel.
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.
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 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.
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 organizationscale further.
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.
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.
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 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 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.
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 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.
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.
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.
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.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
