Different Types: Pros And Disadvantages Of Premium Pricing
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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…show more content… The company uses metal etching craftsmen to etch custom designs into the metal of the pens. Because of the customized nature of the product and its unique ink storage system, as well as the legal protection provided by its patent, ABC elects to price each pen at $2,000, which is substantially greater than its $200 cost. To enhance the image of the product, ABC invests heroically in advertising the pen in premium magazines, and also supports it with a lifetime warranty.
Advantages of Premium Pricing
The following are advantages of using the premium pricing method:
Entry barrier. 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 Pricing
The following are disadvantages of using the premium pricing
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