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Premium Pricing Concept and Examples

What Is Premium Pricing?

Premium pricing definition relates to strategically inflating the price of your product or service to make it higher than that of one's immediate competition. It is also referred to as image or prestige pricing. Premium pricing aims to create favorable consumer perceptions based purely on the price. This tactic aims to create a sense of prestige in the consumer, by making expensive products or services, more desirable. Most people automatically assume that a highly-priced good or service is of superior quality to a cheaper alternative.

Definition

A premium price is when the price of a product or service is significantly higher than similar competing products because the company either demonstrates, or the consumers perceive, that the product or service is of high quality or is particularly unique enough to justify its elevated price. Consumers may also view owning premium priced items as a symbol of status or prestige.

Premium Pricing Factors

Several factors influence premium pricing. These primarily include prestige, quality, and uniqueness. As such, the best explanation of premium pricing is the setting of prices substantially higher than other competing products due to your product's quality, uniqueness, or prestige. In some cases, these factors overlap. For instance, a company may implement premium pricing because its product is unique and of high quality.

  • Quality. Many producers often charge a premium for their goods and services if they can assure consumers of high quality. The quality of a finished good is often determined by the quality of its components and the workmanship that went into producing the good. High-quality raw materials assembled by highly skilled craftspeople will undoubtedly increase production costs. The high demand generated by the quality of the products justifies the premium pricing of such goods.
  • Prestige. Certain products often act as status symbols reserved for a particular class of consumers. Unlike other products that might become expensive due to high demand, status symbols draw demand simply because they are costly. Many brands across various sectors strategically price their goods and services to lock out the average consumer. As a result, those with the means to afford these products then pay a high premium, not for their utility, but for the status effect of owning them.
  • Uniqueness. When a good or service is unique, the person or institution providing this product has no competition. Any consumers that want this product have no alternative but to purchase it from the only vendor that can provide it. As a result, the vendor can charge whatever premium price they see fit. Since they have a captive market, customers will either forgo the product or pay the premium.

Premium Pricing Examples

Premium pricing examples include expensive wines and spirits, luxury cars, bespoke firearms, brand-name watches, and patented pharmaceutical drugs. The first example of a product that may be suitable for premium pricing is a Bentley, a very expensive English luxury car that provides a great deal of prestige to its owners. As a result, many customers will be willing to pay a significantly higher price for the high status of the brand. The same is true for many luxury car brands such as Mercedes, Tesla, Audi, Porsche, and Rolls Royce.

One would think that the premium price of many alcoholic drinks is primarily determined by their quality. However, the primary driver of this premium price is prestige. Several studies have shown that most people cannot reliably distinguish between various wines and spirits. Even so-called wine experts have been fooled into thinking cheap wines are expensive simply by presenting them with expensive-looking packaging designed to trick their expectations. Regardless, people often pay eye-watering sums of money for premium wine brands. As a result of the premium price they pay, they are often fooled into believing their purchase tastes better than the cheaper alternatives. The same goes for most expensive liquors. In fact, products such as vodka and other 'neutral' spirits must be made according to the exact same specifications, according to US regulations. Despite the fact that all vodkas are functionally identical, countless well-known brands such as Absolut, Grey Goose, and Ciroc have made billions by charging customers a high premium for their branded vodka. Essentially, when people buy expensive wines and liquors, more often than not, they are simply paying exorbitantly high premiums for the bottle and packaging, not the liquor itself.

English bespoke shotguns are custom, handcrafted firearms built to the client's specifications. They are made with high-quality hardwoods with custom engravings. As a result, they cost approximately $25,000 or more on average. Premium pricing does not necessarily make a product competitive. These firearms come at such a premium price due to their prestige, uniqueness, and quality, which offers significant prestige to a unique set of consumers.

When companies issue patents for new drugs, they are likely to introduce them to the market at a marked-up premium price. Such companies often justify high premium prices by claiming it helps them recover their investment in developing the drugs despite most drug trials being largely funded and subsidized through taxpayer money. Unlike the custom firearm example, the true basis for the premium pricing of drugs is primarily uniqueness. Brand name drugs are often just as effective as their generic counterparts. However, since the company holds a patent on the drug, no other institutions can produce the drug until the patent's lifetime expires. This uniqueness allows patent-holding drug companies to charge a high premium for their products.

Conceptual Framework

As you can see from the definition, there are a few different ways that premium prices can be supported. Keep in mind that these separate bases of support for premium pricing are not mutually exclusive. In other words, more than one of these characteristics, or even all, may apply to a premium priced product. Let's take a look at each basis in a bit more detail.

High Quality

Products that are composed of significantly higher quality components or function significantly better than other products often support premium pricing. Consider, for example, standardized tract homes and custom-built homes. A tract home has a standard floor plan and exteriors used for many homes and are built with standard contractor grade materials and finishes. The floors may consist of moderate grade carpeting, and the kitchen may use stock cabinets, laminate counter-tops and entry-level appliances.

A custom-built home, on the other hand, may have unique floor plans, custom cabinets, granite counter-tops and hardwood and tile flooring throughout. The quality finishes of the custom home support its premium price.

Unique

Unique products can support premium pricing as well. If a company owns a new patent on a product, then no one else can offer it on the market. New medicines are often expensive because of their uniqueness - the fact that a patent protects the owner from competition for a period of time. Another example includes tailored suits that are hand made specifically out of premium materials for a perfect fit and level of comfort.

Prestige

Sometimes a company may be able to leverage the quality, uniqueness or both into the establishment of a prestige product that is viewed as a symbol of status. Rolex watches and a Rolls Royce sedan are perfect examples of prestige products. While each of these products are high quality and relatively unique, a substantial amount of their value is based on the social cache that a consumer receives from owning them.

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Additional Info

Definition

A premium price is when the price of a product or service is significantly higher than similar competing products because the company either demonstrates, or the consumers perceive, that the product or service is of high quality or is particularly unique enough to justify its elevated price. Consumers may also view owning premium priced items as a symbol of status or prestige.

Conceptual Framework

As you can see from the definition, there are a few different ways that premium prices can be supported. Keep in mind that these separate bases of support for premium pricing are not mutually exclusive. In other words, more than one of these characteristics, or even all, may apply to a premium priced product. Let's take a look at each basis in a bit more detail.

High Quality

Products that are composed of significantly higher quality components or function significantly better than other products often support premium pricing. Consider, for example, standardized tract homes and custom-built homes. A tract home has a standard floor plan and exteriors used for many homes and are built with standard contractor grade materials and finishes. The floors may consist of moderate grade carpeting, and the kitchen may use stock cabinets, laminate counter-tops and entry-level appliances.

A custom-built home, on the other hand, may have unique floor plans, custom cabinets, granite counter-tops and hardwood and tile flooring throughout. The quality finishes of the custom home support its premium price.

Unique

Unique products can support premium pricing as well. If a company owns a new patent on a product, then no one else can offer it on the market. New medicines are often expensive because of their uniqueness - the fact that a patent protects the owner from competition for a period of time. Another example includes tailored suits that are hand made specifically out of premium materials for a perfect fit and level of comfort.

Prestige

Sometimes a company may be able to leverage the quality, uniqueness or both into the establishment of a prestige product that is viewed as a symbol of status. Rolex watches and a Rolls Royce sedan are perfect examples of prestige products. While each of these products are high quality and relatively unique, a substantial amount of their value is based on the social cache that a consumer receives from owning them.

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Frequently Asked Questions

How do you explain premium pricing?

Premium pricing is an effective marketing strategy that helps companies differentiate themselves from their competitors and increase revenue. This can be done by charging higher prices for certain goods or services.

Premium pricing can also help companies attract customers who have more disposable income and are willing to pay more for a product or service.

What businesses use premium pricing?

Premium pricing is used by companies such as Bentley, Apple, and Tesla. It can also be used by businesses trying to differentiate themselves from competitors in the market.

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