Premium Pricing Strategy
Pricing is a major element of marketing any product, and it is vitally important to set the right price. A price that is too high or too low for the target market can seriously affect sales. Premium pricing can use for several purposes. A premium pricing strategy involves setting the price of a product higher than similar products. This strategy is sometimes also called skim pricing because it is an attempt to “skim the cream” off the top of the market. It is used to maximize profit in areas where customers are happy to pay more, where there are no substitutes for the product, where there are barriers to entering the market or when the seller cannot save on costs by producing at a high volume. Premium pricing can also be used to improve brand identity in a particular market. This is called price-quality signaling, because the high price signals to consumers that the product is high in quality. Competition
Some brands can continue to charge a premium price because their entire brand image is based around premium. Unique products usually have the best chance of commanding premium prices.
The first step is to understand that in the so-called luxury market, there are three possible strategies, which I named in my book as luxury, fashion and premium. The difference between these three strategies is huge. It does not change much in the eyes of most basic consumers, at least in the short-term. But when one has to manage a brand, the difference is pivotal. In fact, if you decide to implement a fashion or a premium strategy, the classical marketing styles works pretty well. But if you decide to implement a luxury strategy, you need to reconsider all the aspects of your marketing management.
The luxury strategy aims at creating the highest brand value and pricing power by leveraging all intangible elements of singularity- i.e. time, heritage, country of origin, craftsmanship, manmade, small series, prestigious clients, etc. The premium strategy can be summarized as “pay more, get more.” Here the goal is to prove -through comparisons and benchmarking- that this is the best value within its category. Quality/price ratio is the motto. This strategy is, by essence, comparative.
Here are six factors that will influence your ability to establish and maintain premium price position and reap the rewards:
Become a Premium Provider. Identify the features that would be considered high-end on the value scale, and then highlight those crucial elements in your marketing. Resist the urge to offer a basic service level or baseline product. Stick with the premium level of service if you plan to maintain your premium pricing strategy.
Define Your Value. Help your customers understand why your prices are higher. If you know how competitors are undercutting your prices, and you feel the competitors' lower cost equates to poorer quality or service, explain this difference. In other words, don't hide your price; instead, explain your value to the customer, and be prepared to demonstrate the ROI associated with your service or product.
Go the Extra Mile. You'd be surprised how many business owners declare they offer superior service simply because their people are friendly. Successful companies have more than friendly employees.
Don't Sacrifice Price, Even When Times are Tough. Just explain why your product or service is worth the investment, but be a little flexible for long-time customers.
Don't Play the Lowest Price Game. Weaker competitors are quick to cut prices to earn business. Don't play their game.
Project Financial Stability. A colleague told me about his expensive dilemma. He needed to replace his entire home air conditioning system. He asked two local companies for estimates.
Challenging a Timeless Tradition
Ending prices with the number nine is one of the oldest methods in the book, but does it actually work? The answer is a resounding yes, according to research from the journal Quantitative Marketing and Economics. Prices ending in nine were able to outsell even lower prices for the same product.
Time Spent vs. Money Saved
Stanford University’s Jennifer Aaker argues that in many product categories, customers recall more positive memories when asked to remember time spent with the product over the money
Different Levels of Pricing
Four out of five people chose the more popular premium option.
The cheap option was ignored and it upended the ratio of standard to premium purchases.
These examples show just how important it is to test out different pricing brackets, especially if you believe you may be undercharging. Some customers are always going to want the most
expensive option. Get smart with your pricing strategy. Great products and services are priced on purpose. They have prices that develop over time and are guided by debate, scrutiny, and, most importantly, feedback from paying customers.
Strategies that help grow premium perceptions
Commenting on a recent survey that found 88 percent of U.S. consumers love store brands, Pat Conroy, vice chairman at Deloitte LLP and U.S. Consumer Products leader, stated that many name brands suffer "from a crisis of the similar," giving consumers no compelling reason to choose their product instead of a store brand. He is right.
Build perceptions of product superiority
Innovation, the type that produces a step change in product performance, is still the most effective way to build competitive advantage. Tide Pods and Singapore Airlines are good examples of brands that have used product innovation to improve premium perceptions and justify prices. P&G's commitment to innovation paid off in the U.S. with the introduction of Tide Pods—a three-in-one liquid tablet that allowed the new product to gain market share at a significant price premium.
Build perceptions of value
By framing perceptions of value premium, brands can gain competitive advantage over cheaper brands provided the claim is defensible and not undermined by consumer experience.
Build premium credibility
Irrespective of how the redesign impacts flyers in-flight experience, Singapore Airlines sends a clear signal that they perceive themselves as a luxury brand by teaming up with BMW. In China, Häagen-Dazs presents a unique, indulgent, and adult ice cream experience, primarily through its retail stores. It justifies a significant price premium through locating those stores in upmarket areas, offering unique desserts, and selling wedding cakes designed to appeal to wealthy celebrities. For Johnnie Walker, special blends and gift packs offer the chance to ask a higher price for their well-known brand. Mechanisms like these are designed to build credibility around a brand's premium positioning, making it easier for consumers to justify why they are paying a higher price for the brand.
Advantages of Premium Pricing
The following are advantages of using the premium pricing method:
Entry barrier. If a company invests heavily in its premium brands, it can be extremely difficult for a competitor to offer a competing product at the same price point without also investing a large amount in marketing.
High profit margin. There can be an unusually high gross margin associated with premium pricing. However, a company engaging in this strategy must attain sufficient volume to offset the hefty marketing costs associated with it.