Things to Know about Prestige Pricing

Prestige pricing examples
Since our childhood we have believed that a commodity which costs more is of better quality than the one which is cheap. Although both of them fulfill the same requirements and are more or less made of similar components, we still tend to go for the one which is expensive.

Perhaps the most crucial part after developing a new product is setting up its price. An organization needs to cover many aspects such as production cost, transportation cost, advertising costs, profit, etc. Of course they expect to generate some profit because of all the hard work they have put in to manufacture that particular product. Price is the value received in exchange of any product or service. Price is certainly one of the most important components out of the four Ps (promotion, product, and place being the others), since this is the only one element which generates revenue and profit for the company.

Organizations that are successful are clever when it comes to creating a persona and brand which helps them stay at the top of the marketing chain. This is possible only when the company is successful in touching the hearts of consumers. Why do you think people go and have dinner at luxury hotels with sky-high prices? Because they believe that the classy ambiance and the fine dining experience is worth their money.

Prestige brands sell their products using premium pricing. The price does not justify the real production cost, but guarantees a feel-good experience to the consumers. They cunningly tap into the consumer’s soft spot, otherwise how can one justify the purchase of a dress, or footwear that is for $3000, when the actual manufacturing cost is $40?

Prestige pricing also known as premium pricing or image pricing is a pricing strategy implemented to pull in status-conscious customers. Charging premium price somehow creates a luxury image in a customer’s mind. There are three reasons why an individual will invest in an expensive product:

1. They think high price means high quality.
2. They want excellent performance (when purchasing a pacemaker).
3. They perceive premium price as a symbol of status.

Objectives of Prestige Pricing

► The main aim of every organization is to generate more and more revenue for their company. This means by setting a high price, they expect to have limited sale but profit is still achievable due to the higher markup on each merchandise.

► To maximize the profit in areas where consumers are willing to pay more, and where they know they hold a monopoly in that segment.

► Prices are kept high because there exist certain barriers while entering the market. The seller fails to save on production expenses because the product is manufactured in small quantities.

► To the producer, it means to create brand equity or an image for which the consumer is ready to shell more. Luxury is an important differentiating factor in a product category.

► Since the seller has the ability to control the amount of commodity sold, it helps the company to gives its products an aura of exclusivity.

► Prestige pricing is also implemented to increase brand identity in a peculiar market. Everybody knows about Mercedes-Benz, Starbucks coffee, etc.

► To justify unique products, such products have the right to be expensive because they can’t be imitated by any company. Pharmaceutical companies often protect their products by using a patent.

► Giving the product an elite and classy look will certainly raise its implied value. If the package alone is beautiful, individuals won’t mind paying premium prices for the product.

Advantages of Prestige Pricing

► Products sold with high prices help to create a good image for the product. Customers receive the impression that the commodity is of excellent quality.

► High price helps the company to get back their investment on research and product development costs.

► Due to prestige pricing, competitors or newly launched products have a difficult time entering the market. Due to increased barriers, the company enjoys their monopoly.

► Apart from good quality, brand value of the merchandise also increases thereby increasing its sales among the consumers.

► Due to premium pricing, company can focus all its interest and energy in manufacturing very limited, but world-class products. This gives them the time to produce quality products.

► For companies like these, the main revenue is profit rather than capturing the entire market’s attention. Their primary goal is to earn as much profit as they can, even if it’s by selling 2 or 3 products.

► Premium pricing leaves a halo effect on products. Consumers crave for more such products based on their features and utility. Take the example of Apple iPhones. Though they are on the expensive side, still more and more people are purchasing them – not to forget iPod and iPad.

► Prestige pricing can help in expanding your business effectively. It is easier to keep in touch with your consumers. You will have enough resources and time to cater to your consumer’s problems, which will keep you head and shoulders above the competitors.

► You can certainly expect loyal consumers for a long period of time. Of course they have the money to spend on your products, that’s why they will be ready to stick by your commodities.

Disadvantages of Prestige Pricing

► It’s not always a bed of roses for the companies. It takes very little time for your competitors to manufacture a good quality product with a low price. They will steal your clients by offering such a finished good.

► Though the main aim is to satisfy smaller portion of the market, but they are always at a risk of losing customers, who are not ready to pay a higher price.

► Due to premium pricing, potential consumers may be lost, who are of the view that the product does not justify the investment.

► Since the companies are not producing and selling low volumes, they lose out on the advantage which a high-volume selling producer gets.

► And if the company decides to reduce the price, then the question of quality comes in a consumer’s mind. Since they are so used to the fact that this particular good costs this much, then why sudden decrease in the price.

► The costs required to set up and follow premium price strategy is huge and has to be maintained till the time this strategy is followed. Otherwise the brand of the company will leave a question mark in the minds of people.

► Prestige pricing is useful for products that produce luxurious goods like cars, watches, restaurants. It is not possible and feasible to charge extra for ordinary commodity goods.

Companies such as Bentley, Chanel, Rolex, Starbucks Coffee, BMW, Mercedes-Benz, etc follow prestige pricing strategy. It is a difficult approach to maintain, and companies that aspire to serve such products often lose on a lot of money.

Understanding the 3 Types of Price Discrimination With Examples

3 types of price discrimination
Price discrimination can be referred to as ‘charging different prices for the same goods or services’. Typically, it is carried out to extract maximum possible surplus from the market and also to increase the volume of sales. Inaugural discounts, concessions on volume, special schemes, etc., are nothing but examples of price discrimination.

Broadly speaking, there are 3 types of price discrimination: First-degree, Second-degree, and Third-degree. Out of these, the third-degree discrimination is more frequently observed/encountered than the others. Nevertheless, there is a limit to such price discrimination, beyond which it can be considered as unhealthy and unethical enough to affect the consumers and, ultimately, the economy. The government, through various mechanisms, tries to restrict such practices.

While, theoretically, we all have encountered such types of price discrimination in our day-to-day lives, let’s delve deeper into the different types with elaborate examples and the economic terms attributed to them.

Types of Price Discrimination

First-degree/Perfect Price Discrimination

Features:

1. The seller can accurately collect information about the consumer―his background, economic class, geographic location, individual preferences, etc.

2. The seller has complete knowledge of the highest price the consumer is willing to pay.

3. The seller enjoys some degree of monopoly in the market.

After gaining information about the customer, the seller sells the product to the highest bid that the consumer is willing to offer. In this way, the firm eats up all the consumer surplus. However, this method of price discrimination is rarely seen, since, it is not possible to collect accurate and authentic information of the consumer. Besides, the seller must be able to enjoy monopoly in the market. Also, the transaction costs involved in gaining information about the customer must be compared with the profits gained by implementing such type of price discrimination. However, we can see in a few examples that it is possible to employ such kind of price discrimination where the seller negotiates for the highest bid. The seller will charge different rates for every unit consumed.

Examples:

Example #1: An ‘Auction’ is said to be an example of first-degree price discrimination. The bidder takes the information of the highest price which they are willing to pay, from the consumer, and accordingly, sells the product to the highest bidder.

Example #2: A practicing lawyer will first gather information from the client about his case, its related background, and then, accordingly charge fees for the same.

Second-degree Discrimination

Features:

1. This type involves charging different prices for different quantities sold.

2. Mostly, these price incentives are offered to encourage consumers to buy more. However, unlike first-degree discrimination, the seller does not have to gather information about his buyers.

3. The seller can charge homogeneous prices for all consumers or a particular group of consumers. With purchase of larger quantities, the prices are reduced.

4. The seller can also target a particular group of people by ‘block pricing’.

5. The seller cannot distinguish his buyers, hence, he offers sorted price ranges for every set of demand. However, he will not be able to extract all the consumer surplus, like first-degree discrimination. But, it is more practical and common than first-degree discrimination.

Examples:

Example #1: A classic example is electrical power cost. Households are charged a lesser price per unit power consumed, simply because they consume lesser power than commercial users.

Example #2: Quantity discounts offered at super markets―they offer discounts to consumers on quantity―to encourage bulk purchases. Don’t we all pick up goods in bulk just to avail heavy discounts on bulk purchases?

Example #3: Various industries charge different rates at various time periods―a very common phenomenon in the entertainment and transport industry. Commercial airlines, sometimes, offer concessions for early booking, or movie tickets are costlier on weekends and holidays than other days.

Third-degree Discrimination

Features:

1. This is the most common type of price discrimination, that we come across in our daily lives. In this type, the seller simply charges different prices to different sets of consumers, after distinguishing them on the basis of their age, gender, location, occupation, or any other special characteristic.

2. Their demand must be elastic and the markets must be classifiable into various segments.

3. The seller must be able to prevent ‘resale’ of his products―there must be no selling between two markets―where he sells at a lesser price, and the buyers sell them at higher price to others.

Examples:

Example #1: Discrimination on the basis of age.

– Travel concessions for senior citizens in public transport
– Recreational places, such as amusement parks, zoos, etc., where kids are charged lesser prices.

Example #2: Discrimination on the basis of gender.

– Hair/Nail Salons: Some salons charge different prices for men and women (for instance, haircuts, where it can be argued that women having longer hair than men, and require more styling)
– In some nations, where women are deprived of education, concessions are provided to encourage them to continue their education.
– Some bars sponsor ‘ladies night’; where beverages are sold at discounts or free of cost, to women only.

However, many are of the opinion that such kind of price discrimination on the basis of gender is biased and sexist in nature.

Example #3: Discrimination on the basis of occupation.

– Canteen concessions to staff, free parking facilities, etc.
– Some nations offer concessions to defense personnel, such as concessional medical facilities, education to their children, etc.

Example #4: Discrimination on the basis of quality of service/facilities.

– Different prices charged for the business and economy class by commercial airlines
– Hospitality and hotel industry charges different tariff according to the facilities provided―air-conditioning, number of beds, etc. Luxury and elite rooms are charged higher than the normal rooms.

Something to Ponder!

Today, the online shopping world is growing by leaps and bounds. Sitting in the comfort of your home, you can shop almost anything, anywhere! In the virtual world, the buyer and seller do not meet, and the distance is just a click away. However, that does not mean the virtual marketplace is devoid of price discrimination!

Online sellers display different prices on the basis of location, competition in the market, demand, related costs etc., with the use of software tools available today. Sellers try to analyze how much they can charge a consumer, on the basis of various criteria (as explained in first-degree price discrimination). Of course, these are estimates, and prone to errors.

Whether such kind of price discrimination is healthy is a question of debate. Pricing must adhere to statutory requirements, yet, with the growing Internet market, such kind of pricing policies no longer remain a surprise.

A good advice to consumers would be to be aware of the market prices and compare them with other markets too. Nonetheless, it would always be beneficial to do some research and make a wise and informed decision.