Premium pricing

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Premium pricing (also called image pricing or prestige pricing) is the practice of keeping the price of one of the products or service artificially high in order to encourage favorable perceptions among buyers, based solely on the price. [1] Premium refers to a segment of a company's brands, products, or services that carry tangible or imaginary surplus value in the upper mid- to high price range. [2] [3] The practice is intended to exploit the tendency for buyers to assume that expensive items enjoy an exceptional reputation or represent exceptional quality and distinction. A premium pricing strategy involves setting the price of a product higher than similar products. This strategy is sometimes also called skim pricing because it is an attempt to “skim the cream” off the top of the market. It is used to maximize profit in areas where customers are happy to pay more, where there are no substitutes for the product, where there are barriers to entering the market or when the seller cannot save on costs by producing at a high volume.

Contents

Luxury has a psychological association with premium pricing. The implication for marketing is that consumers are willing to pay more for certain goods and not for others. To the marketer, it means creating a brand equity or value for which the consumer is willing to pay extra. Marketers view luxury as the main factor differentiating a brand in a product category.

Strategic considerations

The use of premium pricing as either a marketing strategy or a competitive practice depends on certain factors that influence its profitability and sustainability. Such factors include:

The disadvantages of this pricing strategy include:

Premium segment

Premium brands are designed to convey an impression of exclusivity or rarity, [6] especially in the mass markets. Targeted customer groups can be high or average income; especially the latter can be premium-aware but on the lookout for bargains. [7] Frequently, companies will invent various (sub)brands to differentiate their product lines into premium and general segments (as, for example, Toyota does with its Lexus marque). In most ways, the premium segment can be thought of as the complement of value brands. The success of a brand is determined by the combination of aforesaid category and the market share. [8] In that sense, the term "premium" replaces the traditional attribute "luxury," although the former can be perceived as less ostentatious. [9]

See also

Related Research Articles

Positioning refers to the place that a brand occupies in the minds of the customers and how it is distinguished from the products of the competitors and different from the concept of brand awareness. In order to position products or brands, companies may emphasize the distinguishing features of their brand or they may try to create a suitable image through the marketing mix. Once a brand has achieved a strong position, it can become difficult to reposition it.

<span class="mw-page-title-main">Distribution (marketing)</span> Making products available to customers

Distribution is one of the four elements of the marketing mix. Distribution is the process of making a product or service available for the consumer or business user who needs it. This can be done directly by the producer or service provider or using indirect channels with distributors or intermediaries. The other three elements of the marketing mix are product, pricing, and promotion.

<span class="mw-page-title-main">Pricing</span> Process of determining what a company will receive in exchange for its products

Pricing is the process whereby a business sets the price at which it will sell its products and services, and may be part of the business's marketing plan. In setting prices, the business will take into account the price at which it could acquire the goods, the manufacturing cost, the marketplace, competition, market condition, brand, and quality of product.

In marketing, market segmentation is the process of dividing a broad consumer or business market, normally consisting of existing and potential customers, into sub-groups of consumers based on some type of shared characteristics.

Brand equity, in marketing, is the worth of a brand in and of itself – i.e., the social value of a well-known brand name. The owner of a well-known brand name can generate more revenue simply from brand recognition, as consumers perceive the products of well-known brands as better than those of lesser-known brands.

In economics and marketing, product differentiation is the process of distinguishing a product or service from others, to make it more attractive to a particular target market. This involves differentiating it from competitors' products as well as a firm's own products. The concept was proposed by Edward Chamberlin in his 1933 The Theory of Monopolistic Competition.

Price skimming is a price setting strategy that a firm can employ when launching a product or service for the first time. By following this price skimming method and capturing the extra profit a firm is able to recoup its sunk costs quicker as well as profit off of a higher price in the market before new competition enters and lowers the market price. It has become a relatively common practice for managers in new and growing market, introducing prices high and dropping them over time.

<span class="mw-page-title-main">Consumer behaviour</span> Study of individuals, groups, or organizations and all the activities associated with consuming

Consumer behavior is the study of individuals, groups, or organizations and all the activities associated with the purchase, use and disposal of goods and services. Consumer behaviour consists of how the consumer's emotions, attitudes, and preferences affect buying behaviour. Consumer behaviour emerged in the 1940–1950s as a distinct sub-discipline of marketing, but has become an interdisciplinary social science that blends elements from psychology, sociology, social anthropology, anthropology, ethnography, ethnology, marketing, and economics.

In economics, a luxury good is a good for which demand increases more than what is proportional as income rises, so that expenditures on the good become a greater proportion of overall spending.

Masstige is a marketing term meaning downward brand extension. The word is a portmanteau of the words mass and prestige and has been described as "prestige for the masses". Ajay Kumar, Justin Paul and Anandakuttan Unnithan defined masstige marketing as "A marketing strategy which envisages to make brands prestigious while retaining its affordability for the mass consumers, by grounding in product and promotion strategies, and keeping prices relatively high". Michael Silverstein and Neil Fiske introduced the term 'Masstige', Justin Paul developed the concept, introduced a scale to measure it and popularised it in his articles in 2015, 2018 and 2019.

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A business can use a variety of pricing strategies when selling a product or service. To determine the most effective pricing strategy for a company, senior executives need to first identify the company's pricing position, pricing segment, pricing capability and their competitive pricing reaction strategy. Pricing strategies and tactics vary from company to company, and also differ across countries, cultures, industries and over time, with the maturing of industries and markets and changes in wider economic conditions.

An aspirational brand is a term in consumer marketing for a brand or product which a large segment of its exposure audience wishes to own, but for economic reasons cannot. Because the desire for aspirational goods is relative to the consumer's purchasing power, an aspirational brand may be a luxury good if the person desires it, or it may simply be any product whether luxury or not if a consumer has less spending money.

Industrial market segmentation is a scheme for categorizing industrial and business customers to guide strategic and tactical decision-making. Government agencies and industry associations use standardized segmentation schemes for statistical surveys. Most businesses create their own segmentation scheme to meet their particular needs. Industrial market segmentation is important in sales and marketing.

A product line extension is the use of an established product brand name for a new item in the same product category.

Value-based price is a pricing strategy which sets prices primarily, but not exclusively, according to the perceived or estimated value of a product or service to the customer rather than according to the cost of the product or historical prices. Where it is successfully used, it will improve profitability through generating higher prices without impacting greatly on sales volumes.

The following outline is provided as an overview of and topical guide to marketing:

A target market, also known as serviceable obtainable market (SOM), is a group of customers within a business's serviceable available market at which a business aims its marketing efforts and resources. A target market is a subset of the total market for a product or service.

<span class="mw-page-title-main">Brand</span> Identification for a good or service

A brand is a name, term, design, symbol or any other feature that distinguishes one seller's good or service from those of other sellers. Brands are used in business, marketing, and advertising for recognition and, importantly, to create and store value as brand equity for the object identified, to the benefit of the brand's customers, its owners and shareholders. Brand names are sometimes distinguished from generic or store brands.

Value-added agriculture refers most generally to manufacturing processes that increase the value of primary agricultural commodities. Value-added agriculture may also refer to increasing the economic value of a commodity through particular production processes, e.g., organic produce, or through regionally branded products that increase consumer appeal and willingness to pay a premium over similar but undifferentiated products. It can also be described as the process that transforms the raw agricultural product into something new through packaging, processing, cooling, drying, extracting, and other processes that change a product from its original raw form. As a result of this transformation, the customer base of a product and revenue sources for the producer are expanded.

Customer cost refers not only to the price of a product, but it also encompasses the purchase costs, use costs and the post-use costs. Purchase costs consist of the cost of searching for a product, gathering information about the product and the cost of obtaining that information. Usually, the highest use costs arise for durable goods that have a high demand on resources, such as energy or water, or those with high maintenance costs. Post-use costs encompass the costs for collecting, storing and disposing of the product once the item has been discarded.

References

  1. ↑ Gittings, Christopher (2002). The Advertising Handbook. New York: Routledge. ISBN   0-415-24391-2.
  2. ↑ "Here is How to Position Your Product as a Premium Brand". entrepreneur. 2016. The best way to position a product as a premium brand is with a high price
  3. ↑ Gerardo A. Dada (2012). "Taking a premium position in the market". Austin AMA / slideshare. Align prices with Value - You might already have a premium product but you are selling it at a commodity price
  4. ↑ "Prestige Pricing: Pros & Cons and Examples". Inevitable Steps. March 15, 2016. Retrieved March 17, 2016.
  5. ↑ Smith, Gordon (1997). Trademark Valuation. New York: Wiley. ISBN   0-471-14112-7.
  6. ↑ "Exclusive, rare, limited, or premium?". thehipperelement.com. 2014. If you have an unlimited supply, everybody knows that lots of people are using it, and there are no restrictions, that means it’s not exclusive, not rare, and not limited. ... “Premium” is an artificial limit on something that is not actually limited, aimed at people who have higher expectations, and therefore a higher perception of value.
  7. ↑ "Quality or price: What makes a product 'premium'?". mycustomer.com. 2013. 74% are on the hunt for a premium product at a discounted rate and love finding a luxury brand at half the cost
  8. ↑ Vijay Vishwanath and Jonathan Mark (1997). "Your Brand's Best Strategy". Harvard Business Review.
  9. ↑ "Luxury versus Premium - Luxury Detectives". wpp. 2011.
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