Premium Pricing Strategy: Can You Really “Just Charge More”?
Premium Pricing Strategy: when pricing professionals are having introductory conversations with non pricing specialists such as General Management or CEOs – the question of whether pricing is more than simply “increasing prices” comes up.
Of course, if you are a regular reader of this blog – you will know that pricing optimisation is infinitely more intelligent than that.
However, in this blog we will look at a major industry sector where companies seemingly do “just charge more” for almost identical products and do not seem to be following a perfect market of competitive based pricing.
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How re-badging shows a real-world premium pricing strategy in action
You may sometimes ask yourself why many modern cars – even with different brands, labels, countries of origin etc end up looking so similar. Cars do not have the variety of yesteryear.
In many ways, your suspicions may be correct, as in many cases – almost identical cars are branded with different badges. There have even been cases when the cars have been identical except the badge.
This is known in the auto industry as re-badging.
Premium pricing means the idea that the products has a higher value than the competition. The management is keen to impress upon its customers that the brand name of leading products is synonymous with quality and superior to that of other brands.
The advantages of this strategy are:
- More profit
- Creates a blockage for entry against the competitors
- Optimizing the brand value across all products
A good example is the Rolex pricing strategy. It’s good as any watch but owning a Rolex means class and prestige. People are willing to pay more just for the privilege of wearing one
When is it premium pricing best used:
- Introducing a new product. Additionally, it is very effective in the strategy.
- One of a kind. Comparatively, the standout attributes of the product makes it more expensive and quality-wise.
- Luxuriousness. Buyers think the product is of high-end quality and consider it a luxury item.
- Limited edition. Limiting the production of the product makes it rare and buyers will go to great lengths to acquire it.
- No copying. Competitors will not copy the product as the company have legal exclusive rights to its design.
- Patents. Any company copying the product will be charged with copyright infringement. And market it as their own.
Establishing Premium Pricing
In order to establish a premium pricing strategy, you need to highlight key attributes of the product. Identifying the customers using the product. And motivated to buy it. Once you have established these essential points concerning the product and customer usage, you can use these customer insights to advertise and market the products in-store and online.
Some tips are:
- Give a demonstration of why it is so expensive and worth the price based on the problems the product fixes.
- Add something more enticing to the buyer aside from the product.
- Don’t be afraid to show the price. If they don’t like it, they can go elsewhere.
- Financial stability. People would be at ease if the company will still be there if it needs maintenance or an upgrade.
Restricting entry of new products. Invest large capitals to advertise as premium products forces the competition to spend heavily to compete for market share for like products. Often smaller companies with limited cash flow cannot afford to compete. Therefore, they remove themselves from the game.
An interesting article in Forbes magazine gives a good overview of the phenomenon : “Rebadged cars are identical in all respects, except perhaps for some tiny cosmetic distinctions such as the placing of the headlamps or the shape of the trunk.
They not only come from the same factories but are in many cases made by the same workers on the same production lines. Yet their prices can vary significantly depending on which maker’s badge is on the grill.” This can be known as prestige pricing strategy.
An extreme example of companies that use premium pricing is a Toyota and a car with a very clear premium pricing strategy – an Aston Martin: “the tiny European city runabout known as the Aston Martin Cygnet. In its most basic version it sells at more than $45,000.
The car is actually made by Toyota and a Toyota version (identical except for some interior accoutrements) can be had for less than $17,000. On an apples-to-apples comparison, Which? reckons the average price discrepancy is more than $31,000.”
- Premium pricing can increase the price of the product even if it has similar features as the competitors’ product
- It concentrates on the standalone feature on what makes it unique from the other products
- Smart marketing ploys can make products appear to be more luxurious than they actually are.
- People are willing to pay the high price if the product brings them prestige, and sometimes when the price is high
- We highlight this instance – as it brings up many questions; what are people actually buying when they purchase a car i.e. a way from A to B or a status symbol, a luxury consumer item or perhaps thinking about resale value, ongoing service and maintenance.
- It clearly highlights that when a move away from commoditisation (and cost plus pricing) is backed up by a strong brand and marketing, as well as a clear value offer – a seemingly identical product can be sold at markedly different prices.
- If people perceive it as a luxury item. The price becomes expensive.
See our blog on price increase strategy.
See our blog on what Santa Claus can teach us on business models.
Premium pricing can, of course, be applied to any products or services – from luxury cars – to coffees and even SEO agencies.
Setting the optimum price point is not just about having higher prices – but will need to reflect some differentiation such as high quality, advertising, brand value vs similar products etc.
Luxury products do not happen by accident – and are often the result of an expensive marketing strategy that enables premium products or premium brands to follow a premium pricing strategy and boost profits. See our related blog on the concept of price skimming.