Intro
Premium pricing strategy means a retailer is consistently pricing their product higher due to competitive advantage. Often clever branding, marketing and messaging that appeals to their customer base. The strategy is mostly used when a company has a solid and strong brand. The premium pricing strategy is used for pricing high-end products. Products that are priced with premium are often unique, have a strong brand image and lots of innovative features. Think about brands like Apple, Rolex, etc. In such a case you are buying the brand to move some of the positive attributes from the brand to yourself. The phenomena is called a halo-effect.
What makes the premium pricing strategy so powerful is the fact that it can increase the profit margin of a product without cutting too much on volumes. You make more money by selling the same number of products to a loyal target group.
Who is it for?
Despite premium pricing strategy being such a promising pricing approach, it is not a good fit for all products and businesses. Companies that can get away with setting high-profit margins are the ones selling products with a high perceived value. People know these products and are willing to pay top dollar to get them. But, in the end, you need a real brand. If you sell a product that people buy mainly because it’s cheaper than the one a competitor is offering, using the premium pricing technique can have a negative impact on your bottom line. If you want to make the most out of this pricing strategy, there are a few things that you should know:
1. Premium pricing strategy is dependent on having a well-established brand. Really well. Once you hit a certain reputation level and perceived value, you can charge much more than your competitors. In most cases still sell your products in volumes. Once again, a clear example of this is Apple. Having this iconic brand status, they now charge $1599 for their newest iPhone models. Another good example is Corona beer that is always very well established in market pricing.
2. Premium pricing strategy doesn’t work in all industries. Premium pricing is a great way to increase your profit margins. You might be planning on investing heavily in marketing and building your brand, so you can use this pricing method once your brand image allows it. Unfortunately, this isn’t possible in all industries. In some cases, no matter how much you put into marketing your brand, you’ll never be able to use the premium pricing methods for your products. No matter how much you promote your detergent, nothing will ever justify it being 40% more expensive than the competition. Before you start paving the way for a premium pricing strategy, make sure that it can be applied to the products that you are selling. This is especially true in cases where you are highly dependable of distribution channels.
You look at Rolex, the average price tag they have on their watchers varies from $7,000 to $12,000. Why is Rolex able to price their watches with high price tags when Daniel Wellington offers watches at $100? Sure, Rolex watches are of great quality. Sure, they look good as well. But the real answer is that Rolex brand is a premium brand. A well-established and known by people, Rolex is able to use premium pricing to price their products.
Read the complete story on pricing strategies
Read the complete story on pricing strategies
Pros and cons
What are the advantages of a premium pricing strategy? One of the strongest advantages that are associated with the method is the fact that it creates a strong barrier to entry. After spending enough time in the market and establishing a strong brand name with premium-priced products, you make it increasingly hard for new companies to compete with you. Imagine a new luxury watch company that’s new to the market and trying to compete with established companies like Rolex and Patek Philippe. Reaching such a reputable status is something that requires years of dedication and lots of money being directed to marketing. The more you stay on top as a premium company, the harder it is for new companies to compete
What about disadvantages? If you want to establish a brand that can price its products using the premium pricing method, you’ll need to invest lots of money in marketing. Your reputation and the perceived value of your product are an essential factor in getting people to pay such high prices for your products. As you’ve probably guessed, good marketing is the best way to make this happen. The more you invest in quality marketing, the faster you’ll be able to establish the brand reputation you’re after. This is a major downside of this pricing method as you’ll have to keep marketing your brand if you want to continue using the premium pricing method. This can hinder your company’s growth, as lots of your resources are dedicated to marketing.
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