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Premium Price: Definition & Explanation

Instructor: Shawn Grimsley
Sometimes people choose to buy the expensive product just because it's expensive. In this lesson, you'll learn about premium pricing and some related concepts. You'll also have a chance to take a short quiz after the lesson.

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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