Premium pricing is a marketing strategy which is used by the companies, under this strategy company sells the product at the substantially higher price in comparison to its competitors so as to target those customers who purchase products due to products high price. In order to understand this concept better let’s look at advantages and disadvantages of premium pricing –
Advantages of Premium Pricing
No Bargaining from Customers
The first and foremost advantage of premium pricing is that since it is targeted at those customers who buy products on the basis of high price only which in turn makes it easy for company to sell these products because once the customer is convinced about the product and there will no bargaining from customers side which is the case with majority of products and hence company has to concentrate only on quality and features of product without worrying about whether customer will buy the product at particular price point or not.
High Margin of Profit
Another advantage of premium pricing is that if the product of the company find acceptance than the company can earn huge profits from the sales which would not have been possible if the company had followed normal pricing strategy. So for example if a company launches product X and there are 2 options one is company charges normal pricing which is $100 per product and other option is premium pricing in which company charges $300 per product now if the product is successful and company has followed premium pricing than it is making extra $200 per sale which is huge and can lead to bumper profits for the company.
Another benefit of this pricing is that since they are high priced products not everyone can buy these products and therefore customer who buys these products tend to show off these products and hence these products achieve cult status in the minds of the customers and every rich person wants to buy the product which further increases the sales for the company.
Disadvantages of Premium Pricing
The biggest disadvantage of premium pricing is that due to company adopting this pricing strategy it loses out on majority of consumers as 99 percent of population are price conscious and if company is following premium pricing than it is making product only for 1 percent of population and when the company has left 99 percent of population than scope of sales is very limited. In simple words, the company cannot grow beyond a point if it is adopting premium pricing strategy.
Marketing and Branding Expenses
Another disadvantage of premium pricing is that since the company is following this pricing strategy it needs to spend heavy amount on marketing and branding of the product because a low price in itself attract customers but for attracting customers for higher priced product company needs strong marketing campaign and also strong brand image which involves enormous money outflow from the company.
It is Not Applicable to All Products
Another limitation of this pricing is that this strategy cannot be adopted for those products which have cut throat competition and elastic demand because if company adopt this strategy in such markets than it will not find any takers leading to the loss for the company. In simple words, premium pricing cannot be adopted for every product and hence it limits its application as far as the company is concerned.
As one can see from the above that premium pricing has advantages as well as disadvantages and company before adopting premium pricing strategy should carefully analyze its products, target customers, company policy and economic environment of the country.