What’s a Premium Pricing Strategy and Will It Work for Your Business?

By April Maguire

4 min read

It’s no secret that pricing is a crucial component of running a business. Not only does the proper pricing of goods affect the amount of money coming into your business, but it also affects your ability to target your ideal market. As a result, it’s vitally important that small businesses set the right prices on their goods and services from the start.

Premium pricing, also known as “image pricing” or “prestige pricing,” means pricing a product above normal market value so that customers think a product or service is more valuable than similar offerings. Although the price may dissuade some buyers, premium pricing proponents believe that the higher cost will create a market perception that will ultimately bring in more revenue.

Some marketing experts refer to premium pricing as “skim pricing” because the goal is to “skim the cream off the top” of the market by targeting those customers who are willing to pay more.

Pros of Premium Pricing

While small businesses may be hesitant to hike up prices on their products and services, research suggests that premium pricing can be effective under the right circumstances. Here are some advantages associated with adopting a prestige pricing strategy for your wares.

Competitor Advantage

One benefit of premium pricing is that it helps companies fend off their competitors in the marketplace. By putting money and energy into advertising premium-brand goods, companies can make it all but impossible for new businesses to enter the same marketplace with investing equal capital in marketing. By preventing similar businesses from launching through spending more (or appearing to spend more), companies can hold on to their market share.

Increased Visibility

If you want to raise brand awareness for your product, premium pricing may be an effective strategy. When companies engage in prestige pricing, customers have a tendency to view their products as more prestigious and, as a result, more desirable. The assumption is that a high price indicates that the product quality is high as well. Further, raising prices can increase product buzz. As people talk more about your product, brand awareness and general interest tend to grow as well.

Improved Profits

Finally, premium pricing strategies offer the obvious advantage of raising a firm’s profits. However, businesses should be cognizant of the fact that prestige pricing tends to require a greater investment in marketing. To stay profitable, companies must either set the price per unit high enough to cover the additional marketing spend or expand their audiences to sell sufficient volume.

Cons of Premium Pricing

In spite of the advantages, not all businesses are equally suited to a premium pricing strategy. The following are drawbacks associated with selling goods at premium prices.

Marketing

The high cost of marketing is a serious drawback associated with prestige pricing. Unless companies invest sufficient—and sustainable—funding to promote their goods and services, the premium brand recognition is likely to dissipate. After all, customers are unlikely to pay high prices for products that they’ve never heard of. If you can’t afford to market your premium brand goods, you may be better off setting rates at a more competitive price point.

Competition

Premium pricing strategies can be problematic for companies with a great deal of competition. Not only can competitor businesses draw attention away from your goods and service by offering alternatives, but they also create a perception in the market that the product category itself is less exclusive or exciting.

As a result, customers are less willing to pay premium prices. In some cases, a company may be able to use premium pricing as a short-term strategy that it abandons when competitors arrive on the scene.

Limited Customer Base

While premium pricing means higher profits on every unit sold, many businesses that try this strategy find themselves selling to a limited customer base. After all, you are effectively pricing yourself out of an entire segment of buyers. If you choose to employ prestige pricing, you need to focus your marketing endeavors on top-tier clients who can afford your business.

Best Businesses for Premium Pricing

While designer items like shoes and handbags are commonly marked up, fashion isn’t the only industry that can benefit from premium pricing. The strategy can also be effective for fields that tend to have strong barriers to entry, such as those with high startup costs or significant marketing costs.

By investing in premium products, a company can make it hard for new competitors to offer similar products at the same prices without raising their marketing budgets significantly.

Additionally, premium pricing can be effective for businesses that don’t have to worry about saving money by mass producing goods. Because the company is restricting the number of units sold, the products and services become more exclusive, and therefore desirable, in the eyes of consumers.

One caveat of employing premium pricing strategies is that it’s far easier to mark products down than it is to raise their rates after launch. In fact, it’s nearly impossible to adopt a premium pricing strategy at a later date without investing a significant amount of cash in marketing and outreach.

If you believe your products merit premium pricing, launch them at a higher price point to start. Have faith in your product and service offerings and trust that the public will as well.

If you’re looking for more advice on pricing strategy, check out the various articles we have on the topic.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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