Posted in Marketing and Strategy Terms, Total Reads: 4845
Definition: Premium Pricing
Premium Pricing is the practice of keeping high prices for the products compared to its competitor’s one in order to maintain exclusivity of the products. Generally, a perception of customer is that product will be exceptionally of high quality and thus is highly priced. Taking advantage of this, many manufacturers practice premium pricing for their products where some are not upto the quality expected by a customer.
This practice of pricing is also called as skimming where companies make maximum profits by occupying the top position in the market. Like, Sony, while introducing its Walkman, practiced premium pricing and gained the control of market. Generally, companies choose markets where consumers are ready to pay more and hence take advantage of it by practicing premium pricing.
Above graph shows the prices of a ball point pen. We can see that ball pen of Company C is priced the highest and it is because of its unique features like metal body, smooth flow ink, high pressure withstanding capability etc.
Premium pricing can be practiced when a company’s brand value is high or when product produced have unique features or when competition is low.
Factors affecting premium pricing
Entry barriers and Competition
Category of product – Luxury or Superior or else
Advantages of Premium Pricing
High profit margin
Increased entry barriers
Increased Brand Value
Disadvantages of Premium Pricing
Able to capture or target only high end customers
Low pricing by competitors may lead to decrease in quality perception
Price fluctuations may lead to decrease in customer’s perception in the quality of product
Possible to sell only low volumes and hence will lose out the advantage which high volume producer may get
Consider a PQR company. Company manufactures sports shoes which have unique features like metal lining, rubber sole, mesh body, cushion feel, water proof cover, lightweight, durable etc. Then, company may price it at Rs.5000 whereas competitors’ shoes can be obtained at Rs.1000 to Rs.2500. Here we can see that company PQR practices Premium Pricing due to unique features of its product.