Published by MBA Skool Team, Last Updated: January 19, 2022
What is 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 and higher perceived quality of the product. 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 up to 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.
There are multiple factors which can lead to higher pricing for products:
1. Information Asymmetry
Information Asymmetry can lead to premium pricing as the product features might be result of knowledge and information with one manufacturer as compared to other players. This can be because of patents, high R&D spent or networking.
2. Entry barriers and Competition
Lower competition can lead to premium pricing. More would be the competition, more choices a customer would have for substitutes which would drive the prices lower. Still there are products which maintain higher prices even though the competition offers lowers options or similar products.
3. Category of product – Luxury or Superior or else
Luxury products can command more prices as they cater to niche and high paying customers. Bags, Jewelry, sports cars etc. are luxury products and lead to higher prices in the respective categories.
Advantages of Premium Pricing
1. High profit margin 2. Increased entry barriers 3. Increased Brand Value 4. Higher Revenue if product is successful
Disadvantages of Premium Pricing
1. Able to capture or target only high end customers 2. Low pricing by competitors may lead to decrease in quality perception 3. Price fluctuations may lead to decrease in customer’s perception in the quality of product 4. Possible to sell only low volumes and hence will lose out the advantage which high volume producer may get
Example of Premium Pricing
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.
Hence, this concludes the definition of Premium Pricing along with its overview.
This article has been researched & authored by the Business Concepts Team. It has been reviewed & published by the MBA Skool Team. The content on MBA Skool has been created for educational & academic purpose only.
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