When I talk about premium prices, I’m referring to a price that is higher than what is considered to be the “normal”, or the average price for a product in a product class. And, that difference in price, can be justified by a higher quality.
Note that when I talk about premium prices, I’m not referring to prices of luxury products. Those are completely different things. Those are special products, often with a quirky demand curve, and for which a main value driver can be… your neighbor not being able to afford them. This post isn’t about that.
A premium priced product does not need to have a super high price in absolute terms. It can be expensive, sure, but it does not necessarily need to be; it’s just more expensive than competitors.
Even groceries can be filled with premium priced products. From organic produce, to special teas and coffee blends, free range meat, wild caught fish… almost everything has a higher quality version available. And those improved versions can command premium prices, sometimes several times higher than their “average” counterparts.
But moving on, one thing I find interesting, is that a lot of people think that a premium price strategy is the highway to financial success. You set a high price, have a huge margin, and it makes lots, and lots of money.
The question then has to be: if a premium price strategy is so great, why isn’t everyone using one?
And the simple answer is, apart from not being easy, of course, it’s not as great as it seems.
Hurdles to implementing a premium pricing strategy
So, what are the real hurdles to successfully implementing a premium price strategy that people often forget about?
To begin, a premium priced product needs to be a premium product. And before you roll your eyes and go “well, duh…”, let me add that that’s the issue with premium pricing that often a lot of people often don’t actually get. Seriously.
It may seem obvious to the point of sounding stupid, but once you consider the implications, it’s actually a big realization.
You see, premium products are expensive to make, and they are expensive to sell. So even if you do achieve a high sales price, at the end of the day your margins may be far from brilliant.
Requirements for making and selling a premium-priced product
1. Deliver premium quality
And quality may have a different meaning depending on your product and market, but whatever it means, you need to deliver it. It may be durability, design, innovation, support, service, availability, flexibility… all of these and a few more, or something completely different.
However, regardless of what is behind your product’s superior value to your customers, you must be able to deliver it.
And you don’t just need to deliver it once. You need to deliver it every single time. Maintaining this level of consistent quality may be hard to achieve, and it’s expensive. Especially when it comes to services where there is an expectation regarding response timeliness.
2. Communicate the superior value
You see, consumers must believe that your product is more valuable than competitors’, if you want them to pay a higher price for it.
So, you need to invest in value communication and brand building. You need to convince people that by paying more, they will be getting something superior. That’s no small task. So, the marketing and sales processes end up putting a lot of pressure on your margins.
For more details, read the post about what it takes to sell a high-priced product.
3. Generate enough unit sales
And then, there’s that sales volume issue…
The fact is that in general demand decreases as price increases. And I know that some people will be willing to pay more for higher quality, and you may be mentally arguing back on that one.
But, even if that’s the case, I would expect that you’d accept that willingness to pay will always be restricted by ability to pay. And if people can’t afford higher quality, even if in theory they would be willing to buy, they can’t.
So… demand in general does decrease as price increases (I have a post on what sets the limit to what you can charge, in case you're interested).
Can value messaging help? Sure. Are people spending money on things that cost a lot more and provide way less value than your product? Highly likely.
Can you convince them to buy your product instead? Great question...
This means that you have to be careful when implementing a premium price strategy. You need to make sure that at your premium price, you can still sell enough units to make a profit. And you need to assess what is the best balance between price and expected sales that will maximize your profit. Is it better to have a higher margin and sell less units, or a lower margin and sell more units?
At the end of the day, profit-wise, pricing too high is as bad as pricing too low (if you don’t believe me, check out the linked post on that subject), so make sure you take that into account when you decide how large your premium will be.
Note that I’m not saying that it’s impossible to achieve a high sales volume at a premium price. It absolutely is possible. Premium products that succeed in being recognized as such, can even become market leaders, because people are willing to pay for their higher quality. My point is that you need to assess whether this is possible in your particular situation.
Charging a price premium: additional strategy implications
1. You will attract different clients
The people who will buy from you at premium prices are willing to pay extra to get a higher-quality product or service. And because they paid for it, they will demand that quality from you.
But not just when it comes to the product itself. They will want a better product, and when applicable, better support and after sales service. So you must prepare to align the level of service you provide with the premium image you want your product to have.
On the other hand, because these people have made a higher investment, they may also be more invested in using your product properly, or in even using it at all.
So if on one side they may be more demanding, on the other, they may also be more keen on enjoying their purchase, sometimes even because they need to justify to themselves that they made a good decision by spending the extra money (otherwise they would have to accept that they hadn’t been smart, and nobody likes to do that).
2. You can't discount frequently
Because overusing discounts is never a good idea anyway; you just train your clients to expect them, and eventually wait for them. And that’s one of the reasons why we sometimes hear stores of high-end brands burning their inventory instead of selling it at a discounted price.
And, in the case of premium products, there’s one additional issue: the underlying message clashes with your intended positioning.
You see, you have a premium product. It’s worth every penny you charge for it. So, if people want to enjoy that level of quality, they have to understand that it comes at a price. That’s what you want to put in their heads. Don’t send out mixed messages.
If your premium product isn’t damaged or perishable, don’t offer discounts! (even if it’s not premium… if it’s not damaged or perishable, generally don’t offer discounts, unless they’re part of a penetration pricing strategy).
3. You need to be careful about product placement
To begin, let’s face it. If you want to build a premium product image, you don’t want it sold at discount stores. Even if your product is sold there at full price, it does nothing for its image to be associated with the store’s low-cost messaging.
And then, by being surrounded by more affordable products, your product looks even more expensive. Don’t forget that the products that surround yours become references, against which your product’s price/value relationship will be judged.
Anyway, you can be hugely successful with a premium price strategy. If you are able to keep your costs down compared to your price, and achieve a high sales volume, you will do great.
But, creating a premium product and delivering consistent high quality comes at a price. And, convincing your potential clients that your product is in fact a premium one, may be far from easy. Not to mention convincing them that the higher quality is worth the higher price tag.
So, before you decide that a premium price strategy is or isn’t the way to go, make sure that you can fulfil all its requirements, and that it can be a profit maximizing option in your particular case.
Always remember that because something works great for someone else, it does not necessarily mean that it will work for you. And vice-versa.
So… if you want to hear about a strategy that can help increase the sales of your more premium offers vs. your basic ones, be sure to read my next week’s post, where I’ll go over how you can use product tiers to take advantage of an interesting psychological effect.
See you in the next one! Bye!