Meaning of Price Premium Metric
Price premium metric refers to a percentage by which the average selling price of brand is either above or below the benchmark price. It is a pricing strategy in which companies set higher price for their products or services as compared to their immediate competitor. Price premium is key metric which is utilized for knowing the competitiveness of products, price strategy, promotion and sales. The business enjoying more brand equity in market find this pricing strategy of more interest where they charge price above the marketplace. Prices are set higher by brands with the goal of creating a perception in customer’s mind that their products are more superior than competitor products due to which are highly priced.
The companies following this strategy are of belief that their brand name is quite enough to assure peoples of product quality over the offerings of competitors. They will not investigate further to find out whether products are really a high-quality item. A premium pricing strategy offers multiple benefits to business in the form of increased profit margins, enhanced brand value for all ranges of company’s product and also create tough barriers to entry for competitor’s entry in market.
Approaches to Price Premium
There are basically two approaches to price premium which are as given below: –
- Average price index: Under this metric, the brand price is compared with the average price being charged in the marketplace. Comparison is made on the basis of retail prices as we are concerned with willingness of customers to buy brands at distinct prices.
- Relative price index: Under the second approach, price of brand is compared with its key competitors existing in market. The competitors offer same range of products as offered by brand.
When to use premium pricing
Following are the situations in which premium pricing strategy is used: –
- Uniqueness: Business which offer unique product in market can differentiate their merchandise from competitors by setting higher price and better image.
- Luxury products: Higher price goods are perceived as luxury goods by customers which have exclusive design and superior quality.
- Limited production: The seller can charge higher price for exclusive range of products. An exclusivity can be created by limiting the product availability in marketplace.
- Early introduction: For the products which are launched early in market, a premium pricing strategy can be most appropriate for them.
- No substitutes: Companies which are products with no close substitutes in market can easily set higher prices. They take all require precautionary steps for ensuring that no competitor is able to copy their products.
- No patents: Companies who possess patent over design or some other distinguish feature of their product serve as a strong deterrent to competitors willing to provide similar products in market.
Price Premium Calculation Using Market Shares
The easiest way to calculate price premium is to have access to both revenue market shares and unit market shares. If this information is available, then the formula for price premium is as follows:
Price premium = Revenue Market Share / Unit Market Share
For example, if Brand A has a 30% revenue market share and a 20% unit market share, then their price premium would be 30%/20% = 1.50 – indicating that they have a 50% price premium over the marketplace.
As another example, a brand that has a 15% revenue market share in a 20% unit market share would have a price premium = 10%/20% = 0.75 – indicating that they have a price that is 25% below the average in the market.
Example of Premium pricing
An organic potato is priced at $15 per kg in market. Whereas, similar product is priced at $12 per kg by other vendors.
Price premium in this scenario= (price-benchmark price/ benchmark price) ×100
= (15-12)/12 × 100 =25%
The price premium is tracked by firm over the time and detected that it has been rising due to discounting by competitors. Therefore, firm take decision to bring down its price modestly.