Much has been written—and even more postulated—about the effect of competition on pricing strategies. Here’s a thought: let’s turn this on its head and consider how premium pricing can affect competition instead of vice versa.
Rather than using your competitor analysis to help you decide how to price your products and services, include pricing options in your strategic planning to position your company as a ‘first-choice’ premium provider; and watch your company forge ahead of the rest of the herd.
Customers attach value in terms of a product’s worth to them. By undercutting market prices, you can cause the following to occur:
- Product devaluation
- Damage to brand equity
- Erosion of profit margins
- Customer disengagement
- Reduced market expectations
It’s also possible that your customers will view lower prices as a form of desperation to compete with other vendors, and nothing drives people away faster than that. Sure, you’ll retain the low-cost customers, but they typically don’t remain loyal to a brand, and will leave at the drop of a hat the next time someone else’s price is a few cents lower.
There are several ways to use ‘premium pricing’ strategies to raise your profile in your industry and set your company a few rungs above the others.
Use Price to Highlight Your Competitive Advantage
Competitive advantage is all about being different, so use your pricing structure to draw attention to your primary differentiator, particularly if it’s one that costs more to implement. The secret to doing this successfully is to link your strategy directly to that feature and make it the basis on which products are priced.
A 2010 article in Harvard Business Review uses the example of Goodyear tires, which had difficulty getting customers to accept paying more for tires that lasted longer. By making a strategic shift to pricing that related to the distance the tires could travel instead of their engineering attributes, the company highlighted the benefits of the feature and increased its value proposition to customers.
Boost Interest with Higher Pricing
Customers enjoy the prestige that goes along with ownership of a premium product. Apple computer products are a fine example of this, and their performance in the market place is proof of the success of the strategy. When clients see a price hike they consider excessive, it ignites curiosity as to what the reason is for the increase. This both raises brand awareness and generates interest in the features of the product. This might not be a sustainable strategy in the long term, but in the short term it’s likely to give your visibility a boost—as long as you can show logic for the increase in price. This is where ‘bundling’ or package deals can offer added value, and sometimes generate more revenue in a bundle than the individual components do.
Implement Component Pricing to Emphasise Value
The flip side of this coin is price partitioning. This is the process of breaking the price down into smaller charges that highlight the benefits of each category. When you purchase a new vehicle, you get to choose from a custom range of accessories and fittings ranging from leather seats through different sound systems. Each of these choices carries its own price tag, along with the difference in value. By offering customers different options, you encourage them to explore fully the features of each instead of focusing on the price.
The challenge with this strategy is that it pushes your standard features into the spotlight, instead of focusing on your competitive advantage, so it’s only viable if your product can stand the scrutiny.
Make All Products the Same Price
With online retailers racking up millions of sales on a daily basis, keeping track of individual pricing can be complex. One way to beat the odds is to make all your products the same price or range. This works for products that have strong similarities, such as music downloads on iTunes, eBooks of a certain size and class. Once price is removed from the equation, the strategy forces customers to evaluate the right product for their needs.
In addition to documenting the terms of the transaction, pricing signals quality of the product or service. By aiming too low, you deliver the message that your product is worth a lower value. If your goal is a reputation for quality and premium service, applying an appropriate pricing strategy you indicate your ability to fulfill the promise to your customer from a position of strength in your marketplace.