Premium pricing is a business practice in which prices are artificially elevated to create an aura of luxury, exclusivity, or higher quality. Premium pricing strategy may also be used when a company offers a unique or under-represented product, since people may be willing to pay more for a rare or unusual item. When using premium pricing, it is important to pay close attention to product quality, since people will only be willing to pay more for an item if they believe its price is matched by its value.
There are several reasons that premium pricing can be an extremely successful strategy. First, market research has frequently shown that many people assume that an item must be worth more if it is more expensive. This means that pricing a product high may automatically create the impression that it is better quality, regardless of the objective truth. In cases where a person believes they need the absolute best quality, they may choose the most expensive product based on this assumption. Secondly, higher-income buyers will tend to buy premium items simply because they can afford to; it asserts their value and monetary worth, and they may be less motivated to search for bargains.
Though any product can take advantage of the possibilities of premium pricing, it is often most successfully used by businesses that have an exclusive market niche. If a product is rare, or demand for the item far exceeds supply, the manufacturer can boost the price simply because people are willing to pay more. When companies have direct competition for a nearly identical product, they will often try to under-price one another to attract the greater share of customers. If a company has no direct competition, it has little motivation to keep prices low when people are willing to pay more.
In order to correctly set a premium price, it is important to understand the existing price range for similar products. If the price range for a bath towel is between $5-$20 US Dollars (USD), the premium price be near or somewhat above the top of the range. Knowing how high to set the premium price depends on the quality of the product, but a certain amount of guessing is involved as well. The average consumer may or may not be willing to pay $25 USD for a towel, based on his perception of its value, but its unlikely that many consumers would be willing to pay $75 USD for a towel. Trial and error may be a factor in figuring out premium pricing.
Some people suggest that premium pricing is an unfair method of market manipulation, and some regions have laws limiting the mark-up that can be placed on certain products. In general, however, the success of premium pricing relies on the consumer's willingness to pay more for what he or she presumes is a superior product. Whether that air of superiority is created by a famous designer name, a reputation for quality, or simply the price itself, it is up to the consumer to decide the fair value of a product. Without the readiness of the buyer to purchase a premium product, there would be no market for such a strategy.