Premium pricing strategies pair well with many of the common subscription billing models and are most often used to establish a perception of higher quality in the marketplace. Traditionally, luxury brands tend to opt for this pricing strategy; however, these days, it’s used in every industry to denote better quality services and products. SaaS companies that have built a solid brand reputation often use this pricing approach in the advanced tiers that offer access to the most features.
Those hoping to implement premium pricing will want to evaluate their market position and make an informed decision by weighing the pros and cons. This blog breaks down the advantages and disadvantages, offering examples of the strategy in action, so you can make an informed decision about whether it will work for you.
The advantages and disadvantages of premium pricing strategies
The pros
- Increases profit margins by charging more for your products and services
- Creates the assumption of better quality when compared to the market
- Improves brand perception which impacts all your other products and services
- Raises barrier to entry for competing brands when executed well
- Better compensation for services allows you to invest more in improvements
- Market dominance is easier to maintain when you price out competitors
- Appeals to customers that are willing to pay more for “the best”
- Boosts Customer Lifetime Value as lower tiers upgrade to the premium tier over time
- Easy to identify target audiences and marketing strategies don’t need to cater to the masses
The cons
- Customer expectations tend to be higher when paying more for a service
- Requires the ability to control the context of where your product/service exists
- Depends on a wide number of factors for perceived value to be high enough
- Premium pricing may serve as a barrier to usage for many in the market
- Ineffective if there’s not enough consumer demand or a unique selling point
- Costs higher for maintaining premium services and supporting product development
- Reduces market share by limiting your potential customer base
- Depends on effective sales and marketing initiatives for often niche audiences
- Leaves your brand vulnerable to competitive strategies such as price-undercutting tactics
When should a brand consider premium pricing?
Premium pricing is best used where there is brand recognition, and a company has garnered a reputation for high quality in a specific market. Newer brands might start with lower pricing, implementing higher price points as reputation grows, and there’s a strong foundation of social clout, reviews, recommendations, and recognition. It may be premature to implement higher price points without first developing a demand for your products and services.
Premium pricing strategies can also be used effectively in tiered offerings to help increase the perceived value of more affordable tiers. It’s well-known in pricing psychology that many customers will gravitate towards mid-tiers, and higher price points on the final tier can make mid-level options more attractive. At the end of the day, choosing whether premium pricing is the way to go will require comprehensive market research, a close analysis of subscriber churn metrics, and a solid understanding of your costs. You can learn more about choosing the right strategy for your company here.
Before you implement premium pricing
- Build a specialized product or service with a unique selling point
- Ensure you know the niche market you’re trying to serve
- Aim to exceed the industry average with your offering
- Invest in bolstering your brand reputation and recognition
Examples of successful premium pricing strategies by industry
Microsoft sets itself apart in the SaaS industry with Xbox Series X
The SaaS industry is a notoriously competitive market, but one in which Microsoft has built an incredible reputation. There’s no question that most of us can quickly recognize the brand. They offer numerous affordable options, and the level of service and quality associated with Microsoft means they can implement premium pricing on select services and products. For instance, Xbox Series X builds on Microsoft’s reputation, giving gamers access to the console they know and the games they’ve come to love at a premium monthly rate. Alternatively, users can buy the console outright, but they will not have access to the Xbox Game Pass.
Canada Goose synonymous with quality in the retail industry with premium pricing
The retail industry is a place where premium pricing is associated with high-quality brands. Canada Goose prices its coats above the average cost, confident in the reputation and recognition it’s built over the years. It’s an interesting example as many of the premium-priced retail brands are designer options, but the pricing here is based on the known warmth and durability of the products. These coats are everywhere in colder North American cities, with consumers happy to pay more for the perceived value.
Fairmont Hotels and Resorts use premium pricing to signal luxury in the hospitality industry
Nowhere does premium pricing come with higher expectations than in the hospitality industry. Brands like Fairmont invest in exceeding standards at every level of their offering. The entire experience caters to premium tastes, from luxury suites to fine dining. Customers expect to be whisked away from the real world into the lap of luxury.
Bolster your premium pricing strategy with a subscription billing solution
Successfully implementing premium pricing strategies will require flexibility in your accounting department. Teams may need to run multiple pricing experiments and require a subscription billing solution that can effectively handle the complexity of pricing models, billing frequencies, and deferral schedules. Get the basics right by investing in a solution that automates even the most complex billing schedules and empowers you to conduct as many pricing experiments as you like without causing unnecessary work for the accounting team.
