Premium Pricing: What is it and How Does It Work?


Premium pricing is when the business charges higher prices of the product than an immediate competitor. The setting of the higher price creates psychological influence in the market that the quality of the product is higher that’s why the business is charging a higher price.

The premium pricing should not be confused with price skimming as the business does not subsequently lower the price in premium pricing while price skimming lowers the price to cover price-sensitive customers as well.

The premium pricing works best when the business has developed brand recognition and a unique selling proposition. The unique selling proposition may be the exceptional quality of the products, loyalty of the customer with the brand, or the satisfaction of the customers with the company’s products.

The strength of the unique selling point helps the business to set the premium pricing. If the strength of the unique selling point is higher the business can charge higher premium pricing and vice versa. Another important concept of setting the price is your offer should be equal to the expected value the business can add for the customer.

Mostly, luxury brands set to opt for setting the premium pricing to build a reputation for their brand because if they charge lower prices the market may perceive that the business is selling cheaper and inferior quality of the goods.

When the Business Can Charge Premium Pricing?

The premium price can not be charged by all businesses at any time. The market is sensitive and multiple factors need to be considered in opting for the pricing strategy else it might prove to be a disaster for the business. Following are certain circumstances that signal the business to charge premium pricing.

  1. There are strong barriers to entry and it must not be easy for the new entrant to enter the market easily. The barriers to entry may be in the form of massive capital requirements, heavy marketing expenditure to get noticed, strong reputation required to sell the commodity, or some complex operations required to develop the product.
  2. The business has developed brand equity and people perceive the products of the company as a luxury product. For instance, KFC and Macdonald.
  3. The business has some control over the market and can control the supply of products to create exclusivity.
  4. The product of the company is protected by patents and there is no/very little competition faced by the business in the market.
  5. The business does have a strong unique selling proposition and does quality if the product satisfied the expectations of the consumers.
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Premium Pricing Advantages

Premium pricing can be an excellent way to achieve the financial goal of the business. It adds value to the business by capturing financial incentives. Following are some of the main advantages of premium pricing.

  1. Setting premium pricing results in higher profitability for the business. Increased selling price per unit yields higher gross profit and net profit margins.
  2. The premium pricing helps to build the reputation of the business as a luxury brand and helps to improve the perception for overall business not just the product under consideration.
  3. Well-execution of the premium pricing strategy can help the business to maintain a strong position in the market as a luxury brand that helps to create a barrier of entry.
  4. Strong profitability is a great motivational factor for the business to operate and grow.

Premium Pricing Disadvantages

The business needs to consider the adverse impacts of charging a higher price than competitors. It’s important to note if the unique selling proposition of the business is strong enough and that enables the company to charge a higher price than its competitors.

  1. To charge premium pricing the business has to develop a brand. The development and maintenance of the brand require massive marketing efforts and costs. Hence, the business has to consider if the economic inflow is higher than the cost incurred in the development and maintenance of the brand.
  2. Competition is the biggest risk when it comes to charging a premium price from the customers. The competitor may offer the same goods/services at a lower price than the market value. This might actually impair the overall brand of the business.
  3. Charging premium prices lowers the volume of sales and production. Hence, the business does not have the higher purchasing power to get economies of scale, and their per-unit cost is higher.
  4. Generally, the companies following a premium pricing strategy may not be able to able to sell aggressively as they just target some upper tier of the customers.
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Premium Pricing Example

Mr. Rupert is a well-known cardiologist in the country. He is known for his excellent knowledge and experience across the country and maintains a strong reputation among patients.

He charges premium prices from patients as he is a brand and his unique selling proposition is his ability to deal with and cure heart-related diseases.

It enables Mr. Rupert to charge higher prices from the patients without worrying about competitors as his professional skills seem to be his strength.

Evaluation of the Premium Pricing Strategy

Opting for the premium pricing strategy is a sensitive matter. It can be a source of massive growth for the business or a disaster if things are not handled accurately.

Opting for the premium pricing strategy can be favorable for a business in some rare situations when they have strong brand equity, brand recognition, less competition, and higher entry barriers.

If the business wants to enter premium pricing, it must develop a brand that requires heavy investment and then expenses to maintain it. So, there is a need to carry out a cost-benefit analysis if the premium pricing strategy should be an option.

The businesses already exercising premium pricing strategy needs to consider if they could earn more by reducing prices, marketing expenses, and getting economies of scale because it’s rare to find the situation where premium pricing is more effective.