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Premium Pricing Concept and Examples

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Daniel Maldonado Shawn Grimsley
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Learn what premium pricing is. Understand the factors that a

business needs to support a premium pricing strategy and see
premium pricing examples. Updated: 04/28/2022

Table of Contents

# What Is Premium Pricing?

# Premium Pricing Factors

# Lesson Summary

What Is Premium Pricing?

Premium pricing de!nition relates to strategically in"ating the
price of your product or service to make it higher than that of
one's immediate competition. It is also referred to as image or
prestige pricing. Premium pricing aims to create favorable
consumer perceptions based purely on the price. This tactic aims
to create a sense of prestige in the consumer, by making
expensive products or services, more desirable. Most people
automatically assume that a highly-priced good or service is of
superior quality to a cheaper alternative.

Premium Pricing Factors

Several factors in"uence premium pricing. These primarily include
prestige, quality, and uniqueness. As such, the best explanation of
premium pricing is the setting of prices substantially higher than
other competing products due to your product's quality,
uniqueness, or prestige. In some cases, these factors overlap. For
instance, a company may implement premium pricing because its
product is unique and of high quality.

Quality. Many producers often charge a premium for

their goods and services if they can assure consumers of
high quality. The quality of a !nished good is often
determined by the quality of its components and the
workmanship that went into producing the good. High-
quality raw materials assembled by highly skilled
craftspeople will undoubtedly increase production costs.
The high demand generated by the quality of the products
justi!es the premium pricing of such goods.

Prestige. Certain products often act as status symbols

reserved for a particular class of consumers. Unlike other
products that might become expensive due to high
demand, status symbols draw demand simply because they
are costly. Many brands across various sectors strategically
price their goods and services to lock out the average
consumer. As a result, those with the means to a#ord these
products then pay a high premium, not for their utility, but
for the status e#ect of owning them.

Uniqueness. When a good or service is unique, the

person or institution providing this product has no
competition. Any consumers that want this product have no
alternative but to purchase it from the only vendor that can
provide it. As a result, the vendor can charge whatever
premium price they see !t. Since they have a captive
market, customers will either forgo the product or pay the
premium.
Premium Pricing Examples
Premium pricing examples include expensive wines and spirits,
luxury cars, bespoke !rearms, brand-name watches, and
patented pharmaceutical drugs. The !rst example of a product
that may be suitable for premium pricing is a Bentley, a very
expensive English luxury car that provides a great deal of prestige
to its owners. As a result, many customers will be willing to pay a
signi!cantly higher price for the high status of the brand. The
same is true for many luxury car brands such as Mercedes, Tesla,
Audi, Porsche, and Rolls Royce.

One would think that the premium price of many alcoholic drinks
is primarily determined by their quality. However, the primary
driver of this premium price is prestige. Several studies have
shown that most people cannot reliably distinguish between
various wines and spirits. Even so-called wine experts have been
fooled into thinking cheap wines are expensive simply by
presenting them with expensive-looking packaging designed to
trick their expectations. Regardless, people often pay eye-
watering sums of money for premium wine brands. As a result of
the premium price they pay, they are often fooled into believing
their purchase tastes better than the cheaper alternatives. The
same goes for most expensive liquors. In fact, products such as
vodka and other 'neutral' spirits must be made according to the
exact same speci!cations, according to US regulations. Despite
the fact that all vodkas are functionally identical, countless well-
known brands such as Absolut, Grey Goose, and Ciroc have made
billions by charging customers a high premium for their branded
vodka. Essentially, when people buy expensive wines and liquors,
more often than not, they are simply paying exorbitantly high
premiums for the bottle and packaging, not the liquor itself.

English bespoke shotguns are custom, handcrafted !rearms built

to the client's speci!cations. They are made with high-quality
hardwoods with custom engravings. As a result, they cost
approximately $25,000 or more on average. Premium pricing
does not necessarily make a product competitive. These !rearms
come at such a premium price due to their prestige, uniqueness,
and quality, which o#ers signi!cant prestige to a unique set of
consumers.
:
When companies issue patents for new drugs, they are likely to
introduce them to the market at a marked-up premium price.
Such companies often justify high premium prices by claiming it
helps them recover their investment in developing the drugs
despite most drug trials being largely funded and subsidized
through taxpayer money. Unlike the custom !rearm example, the
true basis for the premium pricing of drugs is primarily
uniqueness. Brand name drugs are often just as e#ective as their
generic counterparts. However, since the company holds a patent
on the drug, no other institutions can produce the drug until the
patent's lifetime expires. This uniqueness allows patent-holding
drug companies to charge a high premium for their products.

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Frequently Asked Questions

How do you explain premium pricing?

Premium pricing is an e#ective marketing strategy that helps
companies di#erentiate themselves from their competitors
and increase revenue. This can be done by charging higher
prices for certain goods or services.

Premium pricing can also help companies attract customers

who have more disposable income and are willing to pay
more for a product or service.

What businesses use premium pricing?

Premium pricing is used by companies such as Bentley,
Apple, and Tesla. It can also be used by businesses trying to
di#erentiate themselves from competitors in the market.
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