Understanding premium pricing strategies
Boutique carmakers who sell handmade cars using only the finest materials have an obvious quality advantage over a vehicle manufactured on an assembly line.
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.
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.
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.
Indeed, superior brand equity also drives premium prices.
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.
- 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.
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