Premium pricing (also called image pricing or prestige pricing) is the practice of keeping the price of a product or service artificially high in order to encourage favorable perceptions among buyers, based solely on the price. The practice is intended to exploit the (not necessarily justifiable) tendency for buyers to assume that expensive items enjoy an exceptional reputation or represent exceptional quality and distinction. A premium pricing strategy involves setting the price of a product higher than similar products. This strategy is sometimes also called skim pricing because it is an attempt to “skim the cream” off the top of the market. It is used to maximize profit in areas where customers are happy to pay more, where there are no substitutes for the product, where there are barriers to entering the market or when the seller cannot save on costs by producing at a high volume.
Luxury has a psychological association with premium pricing. The implication for marketing is that consumers are willing to pay more for certain goods and not for others. To the marketer, it means creating a brand equity or value for which the consumer is willing to pay extra. Marketers view luxury as the main factor differentiating a brand in a product category.
The use of premium pricing as either a marketing strategy or a competitive practice depends on certain factors that influence its profitability and sustainability. Such factors include:
- Information asymmetry (e.g., when buyers have no independent basis to test claims of "exceptional quality" for a particular product or service -- assuming the concept is well-defined to begin with);
- Market status as a Luxury good or a Superior good; and
- Market dynamics such as the level of competition and entry barriers.
The disadvantages of this pricing strategy includes:
- not possible with commodity goods