Premium pricing is a marketing tool to set higher prices for certain goods in the hope that the higher price will give the impression the good is of a higher quality.
Premium pricing may be applied to similar goods, where there is a slight increase in quality.
Examples of premium pricing
- ‘Premium unleaded petrol’ Premium unleaded petrol usually retails at 5p a litre more than regular unleaded. The Consumer has no real way of testing whether the premium petrol is better, but they might feel that if the petrol is more expensive, it must be a better product.
- Designer clothes. Some manufacturers will deliberately set a high price for designer clothes hoping that the high price will create an impression of a luxury good with better quality.
- Apple iPhone, iPad products. Apple iPhones are generally more expensive than similar competitors. People may equate the higher price with better quality.
- Organic coffee. An organic version of a coffee maybe 30p more expensive than regular coffee. The consumer may feel that the higher price means they are getting a better product. Alternatively, it may just be called a ‘premium roast’ – more expensive than regular coffee. The ‘premium coffee or organic coffee’ maybe 1 or 2p more expensive to produce.
Aspects of Premium pricing
- Demand for premium products tends needs to be price inelastic. Consumers need to feel that it has some unique selling point over other goods.
- The ability to sell a good at a premium – may only be short-lived if other firms can respond with similar goods. For example, if Samsung continues to gain a reputation for good quality, Apple may lose its ability to charge a premium for its products.
- Premium pricing requires strong brand loyalty.
- To maintain the ability to charge premium products may require the firm to stay small. For example, many successful brand labels, like Prada, Ted Baker, Dolce & Gabbana may lose their ‘premium’ status if they become mass market.
Price discrimination. Premium pricing is related to price discrimination as the firm is trying to capture a group of consumers with different elasticities of demand. It is not pure price discrimination because the firm is selling slightly different goods.
Price Skimming – a practice where firms try to capture consumer surplus from consumers with a willingness to pay a higher price.