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.