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How to Formulate A Premium Pricing Strategy

6 tips to earn the right to charge your customers top dollar
August 5, 2010
URL: http://www.entrepreneur.com/article/217176

Customers are constantly looking for ways to save money rather than spend more of it, so companies that position products in the premium price range may struggle. However, with the right formula, you can earn the right to charge customers more than your competitors do. If you've been marketing your products or services as low-cost options, it's difficult to move up the price ladder without devoting significant dollars to aggressive marketing outreach and realistic differentiation between product offerings. The best approach is to launch products as premium offerings from the beginning--if that's what your business model calls for--because it's easier to mark products down (and nearly impossible to mark them up) once they've been identified with a specific price point. 

Here are six factors that will influence your ability to establish and maintain your premium price position and reap the rewards:

  1. Become a Premium Provider. Identify the features that would be considered high-end on the value scale, and then highlight those crucial elements in your marketing. Resist the urge to offer a basic service level or baseline product. Stick with the premium level of service if you plan to maintain your premium pricing strategy.
  2. Define Your Value. Help your customers understand why your prices are higher. If you know how competitors are undercutting your prices, and you feel the competitors' lower cost equates to poorer quality or service, explain this difference. In other words, don't hide your price; instead, explain your value to the customer, and be prepared to demonstrate the ROI associated with your service or product.
  3. Go the Extra Mile. You'd be surprised how many business owners declare they offer superior service simply because their people are friendly. Successful companies have more than friendly employees. They have employees who are so aware of customer needs that they anticipate them. I heard one business traveler's tale about a trip to a Florida hotel. A member of the housekeeping staff at the hotel saw my friend approaching the elevator. While my friend was still 70 feet away, the staff member pressed the elevator button and held it open until he arrived. My friend was certainly capable of calling his own elevator, and the housekeeper obviously had other tasks to perform, but that simple act of doing something extra and waiting patiently for my friend to enter the elevator left such an impression that he offered the highest praise for the hotel to other business associates.
  4. Don't Sacrifice Price, Even When Times are Tough. Just explain why your product or service is worth the investment, but be a little flexible for long-time customers. Do yourself a favor, though, and make a list of the customers you are willing to be flexible with; then make sure your sales team is aware of which customers are on the list so they won't be pressured to make snap decisions. Give employees freedom in dealing with customers, but make sure they know which customers are worthy of special treatment.
  5. Don't Play the Lowest Price Game. Weaker competitors are quick to cut prices to earn business. Don't play their game. Many competitors will fail because they can't generate cash flow to sustain this discounting strategy. Another disadvantage to playing the discount game is that this strategy is the fastest way to push your product or service into the commodity category. Select businesses have carved out a distinctive market by not discounting their products. The challenge is to create and sustain a brand that supports your premium pricing strategy.
  6. Project Financial Stability. A colleague told me about his expensive dilemma. He needed to replace his entire home air conditioning system. He asked two local companies for estimates. The smaller, newer company, run by an entrepreneur, submitted a bid for $4,800. The more established AC company, celebrating its 30th anniversary, submitted a bid for nearly $5,300. While offering significant savings, the entrepreneur didn't realize he was competing based on both price and permanence. The owner of the smaller business told my friend he couldn't do the initial examination right away because his service truck was in the shop. My friend was worried that the 10-year warranty that both firms offered would be worthless if he went with the newer company. The entrepreneur would have won the business if he had projected more stability.

It's natural for companies to focus on the weaknesses of their competition as a way to earn business. However, the true measure of a premium provider is a company that focuses less on what the competition does or doesn't do and more on selling and delivering value to its own customers.