Advantages And Disadvantages Of Premium Pricing

Premium pricing is the practice of setting a price higher than the market price, in the expectation that customers will purchase it due to the perception that it must have unusually high quality or reputation. In some cases, the product quality is not better, but the seller has invested heavily in the marketing needed to give the impression of high quality.

Premium pricing works best in the following circumstances:

There is a perception among consumers that the product is a "luxury" product, or has unusually high quality or product design.

There are strong barriers to entry. These barriers may include such factors as a large marketing expenditure to gain notice among consumers, a large field service operation to support the product, a reputation

If a company invests heavily in its premium brands, it can be extremely difficult for a competitor to offer a competing product at the same price point without also investing a large amount in marketing.

High profit margin. There can be an unusually high gross margin associated with premium pricing. However, a company engaging in this strategy must attain sufficient volume to offset the hefty marketing costs associated with it.

Disadvantages of Premium

The costs required to establish and maintain a premium pricing strategy are massive, and must be maintained for as long as this pricing strategy is followed. Otherwise, the premium brand recognition by consumers will falter, and the company will have difficulty maintaining its price points.

Competition. There will be a continual stream of competitors challenging the top tier pricing category with lower-priced offerings. This can cause a problem, because it increases the perception in the minds of consumers that the entire product category is worth less than it used to be.

Sales volume. If a company chooses to follow a premium pricing strategy, it will have to confine its selling efforts to the top tier of the market, which limits its overall sales volume. This makes it difficult for a company to pursue aggressive sales growth and premium pricing at the same time. The strategy can be followed as long as the company is expanding into new geographic regions, since it is still pursuing the top tier in these new markets.

High unit costs. Because the company using this strategy is restricting itself to low sales volume, it can never generate the cost reductions that a high-volume producer would be able to