Luxury Pricing Strategy
The decision on what to charge for products goes beyond a simple calculation of costs and a mark-up inclusion. Today, companies must also consider how much the consumer is willing to pay and how they value products. There are various pricing strategies that firms can apply to complement their overall strategies, key among them being a value-based approach that sets the price on the basis on how much consumers believe the product is worth (Rao, Bergen, and Davis, 2000). A luxury or premium price implies that customers are able and willing to pay for the products due to a perception of value. Therefore, luxury pricing strategies tactically and intentionally places products higher than the competition, cultivates a sense of higher quality, absorbs perceptions of value from customers, and complements the marketing mix variable employed in a strategy.
The underlying rationale of the luxury pricing strategy is creating favorable perception regarding the quality of products and generating a sense of customer value. With a premium pricing, consumers already have the perception that the quality of the product sold is good, the high costs makes people pay with the ideation that the value is reasonable. By setting premium prices for a product, a company is announcing to the consumers that their products have better quality than the competition and that their pricing is evidence enough (Anderson and Simester, 2003). These strategies apply in dictating the direction of customer value. By using premium pricing, the customer is meant to see that the product is worth more as compared to the available alternatives.
Premium pricing works under certain market conditions that are appropriate for implementation, including high brand loyalty, where competition is low, and where not many substitute products or alternatives are available for the consumer. Premium pricing is based on striking a balance between availability and exclusivity. A premium price must always reflect the main message of high quality, exclusivity, and heritage. The product must always be freely available to those that are willing to pay the luxury price. According to Rao, Bergen, and Davis (2000), it creates a perception of value and also generates exclusivity that separates high end products from the rest. For premium pricing to be effective, the consumer must feel that the product has noticeable selling points over other products or services in the same category and market. The capacity to sell at premium prices is short-lived when firms fail to counter responses from other firms in creating similar goods. For example, it is likely that Apple will lose the ability to sell at luxury prices for its iPhone market if Samsung consistently delivers and creates a reputation of good quality. Therefore, for the luxury pricing to work, issues of exclusivity, consistency, value, competition, availability of substitute and alternatives, and brand loyalty must work together to shape the perceptions of value to a consumer.
Premium pricing strategies have the advantage of gaining higher profit margins, increasing the value of a brand, and generating tougher entry barriers for competitors and new market entrants. In the marketing mix, the individual variables, product, price, place, and promotion affect each other and must be tailored to suit a target consumer group. premium pricing requires that the products be of higher quality, better distribution, and the promotion to emphasize on the features of the product that separate it from the competition (Anderson and Simester, 2003). For example, a luxury price for an electronic device would require the product to be differentiated from the available competition, the distribution channel to be extremely efficient, and the promotion strategy to be extensive in order to reach the target market. The marketing mix variables including product, place, and promotion are affected by a premium price in that they must support the perception of high quality in appearance, distribution, and promotion.
In conclusion, premium pricing is an important value-based strategy that creates and accelerates product demand on the basis of perceived customer value. The luxury pricing strategy operates with the hope that the customer will blindly assume that the product has higher value than the competition. Therefore, companies seek premium pricing when introducing new products, advertising uniqueness, selling luxury products, and to create barriers to entry.
Rao, A. R., Bergen, M. E., & Davis, S. (2000). How to fight a price war. Harvard Business
Review, 78(2), 107-120.
Anderson, E., & Simester, D. (2003). Mind your pricing cues. Harvard Business Review, 81(9),