Luxury brands and most companies selling high-end goods and services utilize the advantages of a premium pricing strategy for two primary reasons: to maximize their earning potential and promote or maintain the perceived stature of the products.
Examples of brands with premium price tags include fashion houses such as Louis Vuitton and Chanel, bottled water Evian, as well as premium carmakers like Mercedes Benz and Porsche. Note that part of the business strategy and a critical element of the marketing mix of Apple is its pricing strategy which involves slapping higher-than-average price tags on its products.
Pros: Advantages of Premium Pricing Strategy
Note that premium pricing is a pricing strategy that involves a particular company selling a product at a higher price than its competitors to exploit the notion that there are consumers who are willing to pay more for a particular brand or product. The rationale behind this pricing decision generally revolves around its supposed advantages.
Take note of the following benefits and applications of this pricing strategy:
• Can Promote Positive Brand Image: One of the advantages of a premium pricing strategy is that it capitalized on the predisposition of most consumers to assume that expensive products have exceptional quality or that the brand itself has a remarkable market reputation that magnifies a certain social status.
• Supplements The Value Proposition: Attaching a high price tag on a specific product can complement its unique selling propositions as defined in its product strategy and the entire marketing mix. These propositions include highest and finest build quality for tangible items or exclusivity both for goods and services.
• Maximizes The Profit Potential: Another benefit of a premium pricing strategy is that it allows companies to “skim the cream” off the top of the market by appealing to a certain market segment willing to pay more. It also benefits products with no to few product substitutes or those in the markets with high entry barriers.
Fashion brands such as Louis Vuitton and Chanel have capitalized on their established brand image and their value proposition that center on indulgence and extravagance to offer products that are about five times to twenty times more expensive than counterpart products. The same is true for automakers such as Mercedes Benz and Porsche.
Apple has succeeded in selling its flagship products such as the MacBook Pro and iPhone at premium prices compared to most Windows laptops and Android smartphones in the market because of its reputation for introducing innovations and the fact that the entire brand has become aspirational for most consumers.
Cons: Disadvantages of Premium Pricing Strategy
This pricing strategy can be a source of competitive advantage for certain companies or brands because of the advantages or the benefits and applications mentioned above. However, it is not for everyone. There can be serious drawbacks such as a tainted brand image or diminished profit potential if a particular company decides to adopt this strategy.
Below are the specific drawbacks and limitations of this pricing strategy:
• Needs A Strong Value Proposition: This strategy is inapplicable to generic products or those that seem to imitate the same product features and benefits of their competitors. A particular product needs to substantiate why it is more expensive than its counterparts and its product substitutes through its value proposition.
• Can Limit Product Marketability: Some products are not ideal for expensive price tags. Examples are new entrants that intend to compete against brands with established reputations and loyal followers or goods intended for the mass market, as well as those in markets with buyers substantial bargaining powers. This strategy does not guarantee profitability.
• Intensifies Competition In The Market: Another disadvantage of a premium pricing strategy is that it can fire back. If developments in the market lower the barriers to entry, it can result in the arrival of new entrants utilizing a penetrative pricing strategy or the emergence of new companies with substantial cost leadership.
Charging a premium fundamentally necessitates a business to build a strong brand. This requires substantial financial resources for massive marketing efforts and a long-term plan to make the brand stick to the consciousness of the target market. Startup companies would require substantial investment both in product development and promotion.
The Chinese company Xiaomi started with a penetrative pricing strategy when it entered the smartphone market and the greater consumer electronics industry. It developed and marketed Android smartphones with mid-range specifications at cheaper price brackets compared with mid-range smartphones from more established manufacturers such as Samsung.
However, several years since it introduced its first affordable smartphone in the market, the company has expanded its product portfolio. Its specific smartphone product line consists of budget-level and mid-range devices, as well as flagship devices with premium price tags that rival Apple and the high-tier smartphones of Samsung.