Premium pricing (also called image pricing or prestige pricing) is the practice of keeping the

price A price is the (usually not negative) quantity of payment or compensation given by one party to another in return for goods or services. In some situations, the price of production has a different name. If the product is a "good" in the c ...

of one of the products or service artificially high in order to encourage favorable perceptions among buyers, based solely on the price. Premium refers to a segment of a company's

brand 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 an ...

s, products, or services that carry tangible or imaginary surplus value in the upper mid- to high price range. 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 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 acqui ...

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. 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: *

Information asymmetry In contract theory and economics, information asymmetry deals with the study of decisions in transactions where one party has more or better information than the other. Information asymmetry creates an imbalance of power in transactions, which can ...

(e.g., when buyers have no independent basis to test claims of "exceptional quality" for a particular product or service—assuming the concept is well-defined to begin with); * Market status as a

luxury good In economics, a luxury good (or upmarket 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. Luxury goods are in contrast to ...

aspirational brand 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 purc ...

, or a

superior good In economics, a luxury good (or upmarket 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. Luxury goods are in contrast to ...

; * Market dynamics such as the level of

competition Competition is a rivalry where two or more parties strive for a common goal which cannot be shared: where one's gain is the other's loss (an example of which is a zero-sum game). Competition can arise between entities such as organisms, indivi ...

and entry barriers. The disadvantages of this pricing strategy include: * not possible with commodity goods

Premium segment

Premium brands are designed to convey an impression of exclusivity or rarity, especially in the

mass market The term "mass market" refers to a market for goods produced on a large scale for a significant number of end consumers. The mass market differs from the niche market in that the former focuses on consumers with a wide variety of backgrounds with ...

s. Targeted

customer In sales, commerce, and economics, a customer (sometimes known as a client, buyer, or purchaser) is the recipient of a good, service, product or an idea - obtained from a seller, vendor, or supplier via a financial transaction or exchange for ...

groups can be

high High may refer to: Science and technology * Height * High (atmospheric), a high-pressure area * High (computability), a quality of a Turing degree, in computability theory * High (tectonics), in geology an area where relative tectonic uplift t ...

or average income; especially the latter can be premium-aware but on the lookout for bargains. Frequently, companies will invent various (sub)brands to differentiate their

product line Product may refer to: Business * Product (business), an item that serves as a solution to a specific consumer problem. * Product (project management), a deliverable or set of deliverables that contribute to a business solution Mathematics * Prod ...

s into premium and general segments (as, for example,

Toyota is a Japanese multinational automotive manufacturer headquartered in Toyota City, Aichi, Japan. It was founded by Kiichiro Toyoda and incorporated on . Toyota is one of the largest automobile manufacturers in the world, producing about 10 ...

does with its

Lexus is the luxury vehicle division of the Japanese automaker Toyota. The Lexus brand is marketed in more than 90 countries and territories worldwide and is Japan's largest-selling make of premium cars. It has ranked among the 10 largest Japanese ...

marque 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 an ...

). 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 Market share is the percentage of the total revenue or sales in a market that a company's business makes up. For example, if there are 50,000 units sold per year in a given industry, a company whose sales were 5,000 of those units would have a ...

. In that sense, the term "premium" replaces the traditional attribute " luxury," although the former can be perceived as less ostentatious.

References

{{reflist Pricing

Strategic considerations

Premium segment

See also

References