Cookies managing
We use cookies to provide the best site experience. More
Accept All
Cookie Settings
Cookies managing
Cookie Settings
Cookies necessary for the correct operation of the site are always enabled.
Other cookies are configurable.
Essential cookies
Always On. These cookies are essential so that you can use the website and use its functions. They cannot be turned off. They're set in response to requests made by you, such as setting your privacy preferences, logging in or filling in forms.
Analytics cookies
Disabled
These cookies collect information to help us understand how our Websites are being used or how effective our marketing campaigns are, or to help us customise our Websites for you. See a list of the analytics cookies we use here.
Advertising cookies
Disabled
These cookies provide advertising companies with information about your online activity to help them deliver more relevant online advertising to you or to limit how many times you see an ad. This information may be shared with other advertising companies. See a list of the advertising cookies we use here.

What is a Premium Pricing Strategy: Complete Guide

By Priceva
on July 14, 2022
One of the most profitable strategies, premium pricing seems to be a privilege of globally acknowledged luxury brands. However, it can be successfully implemented by smaller companies if they do it right. Read this guide to find out what premium pricing is, how it benefits sellers and what risks it implies, and get pro tips on executing this strategy for maximum benefit.

What is Premium Pricing?

A premium pricing strategy means charging a higher price than competitors to create the impression of a high-end product. Sometimes, these prices are really justified by better features or experiences, and sometimes the seller wants to make customers believe that the brand name itself is a guarantee of better quality.

Hence, there are two occasions when premium pricing works properly:
  1. The brand produces genuinely high-quality or unique products, which makes them worth the money.
  2. A company enters the market with little or no competition, and customers are ready to pay extra for products when no alternatives exist.

It should be noted that premium pricing is used alongside a well-developed marketing strategy that enhances brand perception.

Premium Pricing vs. Price Skimming

These two methods involve setting high prices right from the start. However, they have a few differences:
Premium Pricing
Price Skimming
Goods/Products
Used for products that a brand wants to position as premium or luxury ones. Expensiveness of such goods is conditioned by high production costs and, pretty often, the brand’s name.
Used for new products that possess unique or innovative features, meaning there are no alternatives yet.
Duration
Prices stay permanently high.
The product is expensive at the beginning, and its price goes down as competitors start introducing substitutes.
Market Segments
Targeted at upper market segments all the time.
Can be targeted at different market segments. Upon release, the product is bought by upper market segments. When the seller starts charging less, it becomes available for lower, price-sensitive market segments.

Premium Pricing Examples

We could take any luxury brand as an example of premium pricing. If you need a T-shirt, you can order one on Asos for $10-20: it’s of decent quality and will last for a while. On Balenciaga's website, similar T-shirts cost $450-650, and consumers are ready to pay because they perceive the product as higher quality and regard it as a status symbol.

If you need a car to commute to work, you can buy a brand-new Honda for around $25,000. However, some customers would rather drive a Lamborghini, and they are willing to pay more for it. A typical Lamborghini goes for $200,000 on average and is believed to be of exceptional quality, not to mention that it’s more of a prestige symbol than a Honda.

Pros and Cons of Premium Pricing

Premium pricing is not the easiest approach around: it requires quality management, proper marketing and detailed market research. Will so much effort pay off for your company? You need to weigh all the advantages and drawbacks — let us observe them in detail so that you could understand whether this strategy is applicable to your business.

Pros

  • It can result in higher profit margins for a company because of a higher price per unit.
  • This strategy has a positive impact on brand image and overall perception of a company. Not only does a premium-priced product earn a good reputation, but the rest of the assortment is considered to be of top quality too.
  • A properly executed premium pricing strategy can raise entry barriers in your industry. Other companies will not be able to stay competitive without providing matching product quality or changing price points.

Cons

  • The success of a premium pricing strategy really depends on the price inelasticity. Without a unique selling point, you will not be able to justify the expensive price of your products.
  • When you are targeting upper market segments, the cost of product development significantly increases. You will need to use quality materials, hire higher-paid staff and spend more on marketing.
  • Premium items are harder to sell to a mass market. A company that decided to target premium users has to voluntarily price out of lower market segments.
  • When you are operating in a highly competitive market, you risk losing customers to competitors using undercutting strategies. Even though it is less common for luxury markets, there is still a risk of consumers choosing cheaper products or services.

When to Use Premium Pricing

There are several cases when brands charge maximum sums for their assortment.

Launching New Products

A good case in point is Apple. Although the company uses price skimming (charges the highest amount for newly released models of iPhones and MacBooks), it also practices a premium pricing strategy. Their success can be explained by the fact that customers are looking forward to testing new features and some users regard Apple products as a status symbol.

The company invests heavily in omnichannel marketing and provides teasers and presentations that fuel interest and motivate people to buy new devices as soon as they get released. While devices from previous collections become cheaper (which is a part of the skimming strategy), many people are still eager to overpay for accessing the latest models.

Exclusive Collections with a Limited Number of Items

Scarcity of supply is one of the things that encourages status-conscious customers to pay more because they enjoy owning exclusive items. Launching a limited collection evokes a sense of urgency in people: it creates a perception that only a few privileged buyers will be able to use the product.

The efficiency of a premium pricing strategy in this case can be boosted with the help of well-developed marketing campaigns targeted at a certain market segment, not a mixed group of customers.

How to Set Premium Pricing

As we have mentioned above, premium pricing is a very demanding approach. It’s not enough just to charge a higher price – it should be justified and properly calculated so that buyers would be willing to spend money on the product. Here are a few crucial guidelines for leveraging a premium pricing strategy successfully.

Deliver Value Worth the Price

If you want to charge more, you need to justify a high price tag — no one likes being cheated and overpaying for nothing. So, what can be a reason for users to pay extra?

  • Better overall quality, which results in durability and reliability of a product.
  • Improved contents (often used for healthy foods and organic cosmetics).
  • Unique and exclusive design.
  • Innovative features and patented technologies.
  • Unmatched experience and performance.

The product or service has to be outstanding so that customers will see the value they pay for.

Premium Visual Identity

To highlight your product’s status, it is crucial to communicate the right message visually. You need to create a premium look and feel, so that it will highlight your brand identity and build the right image. Marketing of premium-class products is more expensive, so get ready to invest more in advertising and design.

Provide Unmatched User Experience

With premium prices exceeding mass market ones by multiple times, customers expect some really exciting experiences for the money they pay. What does that mean?

If you have ever been to a high-end boutique, you know what sort of in-store ambiance they create: starting from elegant shop window design and finishing with interior fragrance, everything embraces the customer with a feeling of luxury.

Can the same be delivered in the e-commerce industry? Sure! Status-conscious online buyers also expect special treatment which can be expressed in:
  • Highly-customized, exclusive website design that aligns with the brand’s signature visuals.
  • Personalized customer support with timely response.
  • Fast and convenient delivery.
  • Extra quality packaging.

On the contrary, if your website is templated and lacks customization or at least decent customer service, it will impair your brand image. Think of every service detail to deliver an unmatched user experience.

Tailored Brand Messaging

All the above-mentioned points will be worthless if you choose the wrong messaging. Upper market segments have different needs than mass markets. To justify premium pricing, you should ask yourself one important question: “What do my customers want?” Exclusivity, unbeatable quality, flawless customer support — these are standard expectations.

Perform in-depth research of your target audience to learn about their desires and win their hearts with your products. Don’t forget about the individual approach: personalized messages are more appropriate when it comes to premium segments.

Create Exclusivity

Apart from exceptional quality, which is the bare minimum for a premium product, consumers also expect some uniqueness and status that come with the purchase. This is why you need to differentiate from competitors and introduce features that make your products special.

For the SaaS industry, these might be patented technologies. For clothing and shoes, a unique design created in collaboration with celebrities or famous bloggers. Premium foods can be 100% organic, and so on. The idea boils down to offering something that makes people feel like they’re buying the most exclusive and top-quality goods.

Introduce Brand Attributes

Many customers do not just wear and use brands — they want to show off and use these products as status symbols. From sports cars to expensive sneakers, many premium brands leverage unique attributes that make them easily recognizable. Visual identity, messaging, positioning — all these details should align with what a person aspires to be.

Avoid Sales

Upper market segments are not the kind of people who wait for weeks or months to buy a favorite product at a discount. Sales are not likely to motivate them to make a purchase. Worse than that, promotions and big discounts can remove the veil of exclusiveness from your products and kill the product’s perceived value in the audience’s eyes. With so much time and effort spent on building prestige brand associations, this pricing strategy is not worth the reputational risks — the damage might be irreversible.

Conclusion

Before implementing a premium pricing strategy, weigh all the pros and cons. This approach is not suitable for companies targeting the mass market unless they are able to segment their products. And keep in mind that you need to justify the price, otherwise you will lose buyers’ trust after their first purchase.

Also, be ready to compete with strong brands: premium sellers allocate a lot of resources into market research, great positioning and quality promotional campaigns. It’s not enough to offer a high price — you should be able to adjust it according to market changes. With Priceva’s price optimization software, you can figure out the best possible rates for your product categories. The tool automates price analysis and provides pricing suggestions based on elasticity of demand.

FAQ

How is premium pricing used?

This strategy implies setting a higher-than-average price for products and services. There are no upper limits, but the cost should be justified by exceptional value delivered to consumers. Premium products should be of high quality or unique.

Why is premium pricing successful?

This approach delivers nice results if it is implemented in the right way. When a seller targets upper market segments and finds the appropriate messaging, it evokes a sense of exclusiveness and quality that consumers are ready to pay for. Although this strategy requires more sophisticated marketing, it pays off thanks to the high profit margin.

What is the purpose of premium pricing?

There are two ultimate goals of premium pricing. Firstly, it allows the company to increase profit-per-unit and boost overall revenue. Secondly, premium pricing is used to build a prestigious brand image and make it associated with status and luxury.

More to explore