Premium Pricing

Premium pricing is a pricing strategy of setting higher prices to convey an image of exclusivity and luxury. This strategy is common in the technology, fashion, and luxury goods industries. They justify their higher prices based on the brand’s value perceived by customers. This strategy works best when a brand stands out in the market with its reputation, product quality, and unique features. So, customers think that the product is worth the price difference.

While premium pricing doesn’t have a rigid formula, prices are set based on customer perception rather than the actual cost. Companies add production costs, desired profit margins, and market standards together. Then they set a markup to reflect their desired premium position. Brand image, product superiority, and competitor’s pricing influence the final markup.

Why Premium Pricing is Important

The human mind naturally associates high prices with quality and luxury. Brands that aim to attract prestige-seeking consumers who are ready to pay more for exclusive items benefit from this strategy. So, the companies focus more on maintaining exclusivity and not so much on selling large quantities. A loyal customer group that trusts the brand’s quality also becomes less sensitive about price changes.

Applications in Business and Examples

Premium Pricing in Technology

Brands set high prices when they differentiate themselves through innovation and product quality. Apple applies this method to their iPhones, MacBooks, and other products. The company charges more than its competitors because of its brand image, design, and user experience.

Premium Pricing in Ecommerce

Ecommerce merchants highlight specific products’ or brands’ exclusivity features. They offer exclusive memberships to prove the products’ worth and justify the higher prices. Status-conscious shoppers appreciate this approach.

Luxury Fashion

High-end fashion brands utilize premium pricing with their brand heritage and stories. Gucci and Chanel market their craftsmanship to attract customers. They release limited-edition collections to justify higher prices and keep their products rare.

Premium Pricing in Automotive

Luxury car manufacturers attract wealthy customers. Bentley and Rolls-Royce cars become a symbol of status, and performance. These brands charge significantly higher prices than regular car brands. This strategy helps them create loyal customers who really want to pay extra for premium attributes.

Disadvantages of Premium Pricing

Market Limitation: Expensive prices alienate price conscious shoppers. So the brands only appeal to higher-income customers.

Product Competition: Competitors can weaken a premium brand’s reputation by offering similar quality products at lower prices.

Sales Volume: Higher prices lead to low purchase numbers as only a few buyers afford or accept to pay the premium prices.

Wrap-Up

Premium pricing benefits brands that differentiate themselves with their quality. This approach requires a strong brand identity and consumer trust. To maintain their image, premium brands need to deliver their value promise consistently. It can significantly enhance brands’ value and profitability when executed properly.

Explore more about Pricing

Price

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Price Elasticity

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Price Leader

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We know the fierce competition in the ecommerce industry compels you to compete on price. But some shoppers don’t search for cheap prices. Instead, they look for exclusiveness. Premium pricing (prestige pricing) is the perfect fit for ecommerce vendors who’d like to establish a high-end company with a stellar brand identity.

What is premium/prestige pricing?

A strategy where businesses price a product higher than the market average to strengthen perceived quality and establish a luxury brand image.

There are two scenarios in which prestige pricing works well:

• Either your brand has a premium feel to it. Meaning that your products are indeed high-quality and exclusive, and they deserve the money.
• Alternatively, you’re entering a market where there is a demand for your product but no current competitors. Customers are happy to pay more for products when no other options exist.

So, let’s take a deep dive into prestige pricing and establishing a luxury brand.

Premium pricing is all about luxury

You might be surprised to know that any product can be considered premium. Take this t-shirt, for example.

It costs £280.

Now compare it to this t-shirt which (from appearances only) seems very similar. This second t-shirt would only cost you £12.50.

Would you pay for the first t-shirt? Maybe. Some people surely do. However, they wouldn’t if they knew it would rip within three months.

Luxury involves more than simply adding the word “luxurious” to your product descriptions. It needs to be high-quality and it needs to feel luxurious. But if your product is unique, perhaps you don’t need to market it as a premium one.

How unique is your product

When you’re the only seller of an item, it goes without saying that you can charge more. That’s why sellers on Etsy are able to charge more for their items.

Such as this one:

The product on Etsy is unique. If you purchase it, you’ll be one of the few that possess it.

Whereas when you buy this one, you’ll be the owner of an item loads of other people have as well.

However, design is not the single aspect of uniqueness. If your groundbreaking technology hasn’t been adopted by competitors, you can profit well with a premium pricing strategy.

Take Apple for example. Back then when the company monopolized the smartphone technology, iPhones were sold at premium prices and all the sellers ran out of stock within hours.

Today, Apple’s products don’t embody a unique technology or design, yet they still charge premium prices. Apple has a much smaller audience than it was when the iPhone was first released, but they are willing to pay more for this prestigious brand.

These Airpods look very similar to the ones below from Amazon but that doesn’t mean they can’t charge a premium. After all, Apple has adhered to the first strategy and ensured their products feel luxurious and priced based on their customer’s perceived value.

Advantages

• Needless to say, if you increase the sale price of a product, you’ll obtain higher profit margins. Even if fewer people can afford to buy iPhones than a Xiaomi phone, Apple’s smartphone profits are four times larger than its closest follower, Samsung. Meaning, you can make more profit with fewer people.

• Brand value and prestige price have a mutual relationship. While a high brand value allows a brand to implement prestige pricing, in turn, prestige prices improve a brand’s value.

Disadvantages

• Remember, as a prestige brand, you need to make it seem like your products are high quality and that means marketing your products in the same manner. Brands like Nike or Adidas will spend millions per year on marketing and advertising. The thing is though, it works.

How to tell a brand story when implementing premium pricing

Some key points when it comes to crafting your product or brand story:

• Explain what makes your product different. If you’re going to pay $4 for a bottle of water instead of $1, you want to know what makes the $4 water different.
• Show (don’t tell) your customers how they’ll feel when they own your product. Your customers need to feel your passion for your business and part of that involves showing (not telling) why your products are awesome.
• Be transparent. Transparency is key. If you source your materials ethically, talk about this. If you only hire local workers, talk about this. If you use your profits to give back to the community, talk about this. The more open you are with your business and process, the more open your customers will be with their money.
• Be consistent. This means your story should be told accurately across all mediums. Whether that be your product descriptions, blog posts, or social media. Customers and potential customers should feel your story wherever they are and whenever they decide to buy.

For example, TOMS has an entire section of its website dedicated to telling the story of how they give back as a brand.

Let’s wrap it up

But before you dive right into prestige pricing, make sure you’ve really considered whether your products or business warrants a higher price.

You need to let your customers know about your product and why it’s more expensive than the others.