Premium pricing

Premium pricing means charging a consistently high price for a product and keeping it high over time. High-end and luxury brands, such as a premium watch maker or a designer sunglasses label, use it to signal quality and status rather than to compete on price.

The strategy relies on an exclusive image and desirability. Customers pay more because the product is seen as special, well made or a status symbol. Not every customer can afford it, and that can add to its appeal: owning something expensive and less common makes customers feel they are buying into an exclusive group. The high price must match the quality, packaging, service and brand story, or customers will not accept it. A premium price is not simply a high price for a good product: the price itself has to stay high over time to build that image.

A premium price can support a high profit margin because the business keeps more from each sale than it would at a lower price. Even if it sells fewer units, it may earn far more per item. For example, a small brand sells handmade desk lamps for £180. Materials and labour cost £60, leaving £120 from each lamp before other costs. Cutting the price to £90 might sell more lamps, but each sale would leave only £30, and the luxury image could be damaged.

Demand can fall if customers' incomes fall. They may decide they cannot justify the high price and switch to cheaper substitutes. A business charging premium prices therefore depends on customers still being willing and able to pay, and on protecting its exclusive image during tougher times.