What Is Premium Pricing Strategy? (Pros, Cons & Best Examples)

[Video Breakdown]

One-click subscribe for video updates

Why Use A Premium Pricing Strategy

There are many reasons a business might choose to use a premium pricing strategy when setting its prices in the market.

One of the most obvious is the association with quality.

As people, we’re still quite primitive and many of our buying decisions are made in our subconscious.

How the premium pricing strategy works illustrates our primitive nature which you’ll understand through your own buying experiences.

The Psychological Impact Of Price

Generally speaking, when we see a higher priced product, we associate that product with higher quality.

In reality, this isn’t always true, but our brains have been making shortcuts for millions of years to help us survive and this is an engrained shortcut that we’re all hardwired with.

Now of course, the closer we get to that buying decision, the more we’ll use our neocortex to analyse other aspects of the buying decision, though the high price-point instantly aligns the brand with higher quality.

This also comes with plenty of emotional benefits as well including peace of mind, excitement through experience and the sense of elevated status that comes with high-end or premium products.

And we create this image based among other things on the price tag attached.

Explore Brand Strategy
Programs & Tools

When To Use Premium Pricing

Premium pricing isn’t always an applicable strategy. Its success depends on factors like demographics, product quality, and brand name. And in some cases, it may very well be the wrong strategy depending on the target market and desired position.

Premium pricing may be used in the following scenarios

Luxury Association

Brands that want to establish a sense of prestige and luxury will most likely forego competitive pricing and instead, leverage a premium pricing strategy with higher prices compared to their closest competitors.

First Mover Advantage

Brands with first-mover advantage or early introduction of a new product or approach can set the benchmark with premium pricing in the category.

Exclusivity

Where production is limited (for example, they can only produce a set number of units per year), brands can set premium pricing to establish a sense of exclusivity.

Patented Process

Brands that are able to protect their unique process with patents can establish a competitive edge and set premium prices without fear of being undercut.

High Barriers For Entry

When a business has access to extensive funds, they have an opportunity to create products with high quality that no competitor will be able to make substitutes for.

In this case, the added cost that is passed on to the consumer through a premium margin is also expected.

Unique Experience

Many businesses pride themselves on the experience and high attention to detail they offer their customers. Where brands offer a distinctly unique experience, a premium pricing strategy should be considered.

Premium Pricing Strategy Pros & Cons

The premium pricing strategy has many advantages, but it’s not a silver bullet.

There are plenty of drawbacks too making the strategy difficult or even impossible for some brands.

So let’s take a look at the advantages and disadvantages in a bit more detail.

Advantages To Premium Pricing

Premium priced brands tend to be more desirable that most, but there are other major advantages too:

Higher Profit Margins

Pricing your products at a premium injects the business with the holy grail of marketing, branding and business in general. That is, increased profitability per unit sold.

Although the cost of production will provide the business with a pricing benchmark, they don’t restrict the business from pricing products as high as they want, relatively speaking. The higher the profit margin, the more the business banks per sale.

Enhanced Brand Perception

How a brand is perceived in the market influences consumers’ willingness to purchase and to purchase at a premium.

By leveraging a premium pricing strategy, the brand is instantly associated with a sense of superior quality, service and overall experience. Provided they can back it up, that perception can become reputation.

A classic example of premium pricing is Rolex. Rolex and Casio watches achieve virtually the same. However, the former has fostered a reputation as one of the world’s leading luxury brands in its space.

Enhanced Competitive Advantage

Higher pricing as a strategy keeps competitors at arm’s length. By comparison, their perception in the market will often be inferior, and their lower price point puts them under pressure to sell more units to match profitability.

This advantage also gives premium priced brands more flexibility within their strategic decision making.

Disadvantages To Premium Pricing

As I mentioned earlier, premium pricing is no silver bullet and there are plenty of disadvantages to this pricing approach that should be considered.

How To Create A Premium Pricing Strategy (To Build A Prestige Brand)

[Video Breakdown]

One-click subscribe for video updates

Higher Marketing Costs

The path to purchase for premium-priced products tends to be longer, meaning higher marketing costs to generate brand awareness, to earn trust and to move them along the customer journey.

Smaller Target Segment

By nature, premium pricing prices many market segments out of consideration.

In other words, much of the market won’t be prepared to pay or to be able to afford premium pricing, meaning the target market segment contains a smaller pool of potential customers.

Open For Undercutting

Brands and businesses with comparatively similar products in terms of quality, functionality and benefits may undercut the premium priced brand or take a more aggressive strategy and position against it .

This put the premium pricing position under pressure from the broader market.

Premium Pricing Examples

Premium pricing strategy examples are all around us. From the top shelf at the grocery store to the glass panel windows on the high street.

So let’s have a look at some of the best premium price strategy examples.

Apple Premium Pricing Strategy

The most iconic example of a brand that consistently leverages the premium pricing strategy is Apple.

There are countless tech brands operating in the market providing desktop computers, laptops, tablets and phones.

Yet, iPhones are priced up to three times more than their competitors.

The MacBook Pro is up to three times more than its competitors.

Does this mean their products are three times better in terms of quality? The answer is no.

Yes, Apple’s quality stands alone in my opinion.

But beyond quality, Apple has done an excellent job of fostering brand loyalty. The willingness of their customers to queue in the streets for hours or even days to get their next release, while they could walk into another store and get the next best option and keep at least half of their money in their pocket… tells you everything you need to know about how masterfully Apple have executed on their premium pricing strategy and more importantly, their position in the market.

It’s not just about the quality of their products. It’s the entire experience from their beautiful designs to their in-store experience to their support.

Everything about Apple speaks to its premium position.

Nespresso Premium Pricing Strategy

Nespresso is another excellent example of a brand that leverages the premium pricing strategy to great effect.

Nespresso made the most of their first-mover advantage in the coffee capsule and machine category. 

Like Apple, their sleek designs and end-to-end experience aligns more with high-street fashion stores rather than mass-market grocery stores where you would normally buy coffee.

Their limited distribution channels keep the Nespresso brand off the supermarket shelves, while their licensing of their capsule design to brands with a supermarket presence gives them the best of both worlds.

Their premium brand equity is protected allowing them premium pricing and exclusivity through their Nespresso club subscription model and shopfront experience while their licensing structure gives them a slice of the broader market.

How To Establish Premium Pricing

Implementing a premium or prestige pricing strategy is not simply a case of slapping a high price on your products or services and expecting your customers to pony up…

If you’re going to ask your customers to pay more for your product or service than they would with your competitor, you’d better be sending the right signals.

Here’s how to establish your premium pricing strategy.

Align Value With Price

Though some market segments expect to pay more for better, no one likes to have the wool pulled over their eyes, to be duped or to feel stupid.

If you’re setting your prices at a premium, there has to be a better compelling reason that your customers value to justify the extra spend.

This can come in the form of

Ingredients

Materials

Taste

Nutrition

Experience

Design

Reliability

Performance etc.

Premium Visual Identity

If you want to play the part, you’d better look the part with a visual identity that speaks to your premium positioning.

The category you’re playing in and the market segment you’re targeting will be instrumental in determining your look and feel, though it’s essential your identity communicates the right message visually.

Unique User Experience

As I mentioned earlier, the path to purchase for prestige-priced products is typically longer, depending on the category.

This means that more touchpoints are required and each touchpoint must be aligned to provide a seamless experience.

For example, if your website user experience or your in-store design looks templated, cookie-cutter or void or customisation or uniqueness, it will work against the prestige your price suggests.

Tailored Brand Messaging

All brands should understand who their audience is and exactly how to speak to them through tailored messaging .

But this point is especially relevant with premium positioning.

While some brands in certain categories may survive with broad based messaging to mass markets, prestige positioning requires delicacy and finesse with targeted messaging speaking to the personality, class and desires of the audience.

Create Exclusivity

Premium pricing strategy examples are all around us. From the top shelf at the grocery store to the glass panel windows on the high street.

So let’s have a look at some of the best premium price strategy examples.

Leverage Brand Attributes

Consumers want to see themselves in the brands they buy, which is especially true when it comes to premium purchases.

We all have aspirations to be the best version of ourselves, and prestige brands must communicate to their audience that they are the person they aspire to be.

Brand attributes communicate through visual identity, messaging, storytelling and experience aligns the brand with the aspirations of their target market.

Avoid Promotions

Premium positioning and pricing is not a strategy that you use today, drop tomorrow and pick up again next week.

If your niche market is after exclusivity as much as quality, then you give away that exclusivity by dropping your prices with promotions.

Promotions also erode the prestige brand associations you build up and overtime, the erosion becomes irreversible.  

Over To You

As I mentioned earlier, premium pricing is just one pricing strategy among many.

Although many brand leaders aspire to build prestige brands with aspirational attributes and high profit margins, it’s not what the brand leader wants that matters.

As with anything in branding, all decisions must consider who the target market is, what they want and how to give them what they want in a way that’s effective and efficient for the business.

If your market desires exclusivity, prestige, high quality or all the above and if they have the budget to pay for it, then a premium price point may just be the pricing strategy you need.