Premium Pricing is Alive and Well

$1,000 for a cell phone? Premium pricing is still alive and well

And there it is; Apple is going to sell a $1,000 iPhone.

Of course, the iPhone X will be more than just a phone. It will represent the latest in artificial intelligence and smart technologies, including its most notable feature: face recognition that allows users to unlock their phones with a look. It sounds like a Tom Cruise movie gone terribly wrong.

One might wonder- does super premium pricing still have a place in an omnichannel, hyper-competitive world where consumers select one product over another to save a few nickels? It seems 40 years haven’t changed the strategy theory; uniqueness still carries cache. People will pay the $1,000 just to make conversation at a swanky office party over their infused Moscow Mules (for some reason, I am rarely invited to such parties).

In retail, this consumer phenomenon is referred to as treasure hunting. You may board a Southwest flight and notice the guy next to you inhaling three bags of free peanuts while checking his Rolex watch. People will trade down on some goods so they can afford the luxury goods they value. We even do this in B2B (business-to-business), where some services such as janitorial go to the lowest bidder, while intellectual attorneys can fetch $750 an hour. I hate those guys.

Yet the upside of premium pricing models is often misunderstood. For some venerable luxury brands like Bentley and Gucci, super-premium is the finite market they serve. For other providers, premium pricing is part of the broader positioning of a brand. In B2B you could think of this approach as “good, better, best.” By offering best, the provider positions better as the value-oriented choice. Given three options, buyers will select the middle option a majority of the time. A premium offer can improve a brand family’s profitability, even if it is not the focal point.

Our clients, who are largely premium providers, are wondering how they can survive the onslaught of price competition. Many premium brands are creating value labels that protect their brand positioning while offering choice. Consider TUMI’s T-Tech brand. With T-Tech by TUMI, the provider offered a brand promise with slightly less quality than a TUMI bag, but at a value price. This “straddle” pricing strategy allows the provider to keep the customer within the family while attempting to trade them up.

Hotel chains try to hit every conceivable price point. DoubleTree by Hilton is positioned as Hilton lite (although the afternoon snack they provide is not exactly “lite”). The same customer who prefers Hilton while at a downtown conference may prefer DoubleTree or Embassy Suites for a weekend trip with his family. This is proof that perceptions about price are not absolute; a buyer makes selections based on circumstances.

Super premium and premium pricing are here to stay. Even in an environment where there is pressure on price, the laws of competition still apply.

For more on pricing and strategy, see the Optimize Blog.