There’s something appealing about exclusivity. When a product is difficult to obtain—and highly desirable—consumers are likely to perceive it as valuable. According to prestige pricing theory, these are instances where you can actually increase demand by charging more. Here’s what prestige pricing is, how it works, and how it can benefit your ecommerce business.
What is prestige pricing?
Prestige pricing—also known as image pricing or premium pricing—involves using high prices to suggest a high-quality product or service. It operates on the principle that price is one of the main drivers customers use to determine a product’s value.
According to this theory, customers perceive a more expensive product as higher quality and a lower-priced product as less so. You can use prestige pricing to target customers eager for a premium product, like habitual luxury shoppers, or people motivated to splurge on high-end goods under certain circumstances, such as for a gift or to celebrate a special occasion.
Advantages of prestige pricing
Prestige pricing can help you communicate exclusivity, boost demand for a product, and increase profit margins. Here’s an overview of the benefits:
Increased revenue
Prestige pricing doesn’t increase the costs of producing products, so a prestige pricing strategy can increase revenue and profit margins.
For example, imagine that you produce a hot cocoa mix that costs you $1.76 per unit. Under a standard pricing strategy, you might charge $2.99 per unit—enough to offset your costs and provide you with a profit on each sale.
Under a prestige pricing strategy—assuming you can convey your product’s superior qualities—you might charge $6 per unit, increasing your profit and revenue on each transaction without increasing your market share.
More demand
Prestige pricing strategies can also increase demand for a product. This is particularly true if you limit product supply to suggest exclusivity.
For example, you might release a limited edition handbag with the expectation that it won’t fulfill the demand for the product. Not every consumer who wants a handbag will be able to obtain one, and this scarcity can confirm consumer assumptions that the handbag is appropriately priced. Your company may be able to maintain (or even increase) prices on future product launches and increase production volume.
Improved brand perception
The baseline assumption of a prestige pricing strategy is that potential customers use price to determine value, which means that increasing prices can lead customers to assume that products are higher quality—boosting your brand image and creating a perception of greater brand value.
Disadvantages of prestige pricing
Although prestige products typically don’t cost more to make, a prestige pricing strategy can increase your marketing costs—and a failure to invest in luxury product marketing or align a new strategy with market needs can make your strategy backfire.
Here are three potential disadvantages of prestige pricing:
Decreased sales volumes
In some cases, adopting a prestige pricing strategy can hurt sales. Although you earn more money on each sale, charging more can restrict the size of your target audience.
Conduct target market research to understand how a higher price point might affect your sales volume. This might require calculating whether increasing your profit per transaction can offset the potential loss of customers.
Higher marketing costs
Although raising prices can imply increased product value, this strategy involves marketing investments to support an elevated brand image and justify the higher prices.
Creating prestige marketing materials can be expensive, and you might also need to invest in upscale packaging and sales infrastructure to communicate consistently that you offer a high-value product or service.
Damage to brand image
Boosting prices can improve your brand image—but it can also damage your image. Your prestige pricing strategy can backfire if your customers perceive that your prices aren’t associated with actual product value.
Prestige pricing strategies
- Create a tiered pricing model
- Launch an exclusive or limited edition product
- Use psychological pricing
At its core, prestige pricing involves setting a higher price to signal superior quality. You can use several strategies to encourage customers to respond favorably.
Here are a few tactics and a prestige pricing example for each one:
Create a tiered pricing model
Companies can use tiered pricing models to differentiate products or services within their offerings to create a higher-priced option for customers seeking a premium product.
Tiered pricing models can highlight the differences between premium and standard product offerings and showcase the additional features offered for the higher price.
For example, a company that sells smart pet beds might offer the following product tiers:
- Standard
- Built-in heating
- Timed on/off
- Chew-resistant
- Made from organic and non-toxic materials
- Premium
- All standard features, plus:
- Cooling
- Automatic on/off and nap detection
- Premium plus
- Standard and premium features, plus:
- Antimicrobial coating
- Bluetooth connection
- Built-in massage features
- Aromatherapy portal
Launch an exclusive or limited edition product
You can launch exclusive or limited edition products at a higher price point and control the total volume of available products. Limited edition products are designed to sell out, which can increase perceived value, creating competition among consumers and justifying a steeper price tag.
For example, an apparel company might launch a limited edition T-shirt collab with a renowned graphic novelist, limit production to 500 units, and charge $75 per shirt instead of the company’s normal $40.
Use psychological pricing
Psychological pricing sets prices to influence consumer behavior, encourage sales, and increase total sales revenue.
For example, budget brands often use numbers ending in nine to give the appearance of low prices. Luxury brands can use this same principle to the opposite effect, selecting round numbers or prices ending in five precisely because those figures aren’t associated with bargain hunting.
For example, a drugstore cosmetics line might sell blush for $4.99, while an upmarket cosmetics company might sell a similar item for $12.
An example of prestige pricing
Consistency is critical to a prestige pricing strategy. It’s why you won’t find Chanel offering discounts on its classic leather handbag, even though the handbag retails for more than $10,000 and unit production costs may come in at only a few hundred dollars.
Although luxury shoppers are aware of the large markups on premium goods, consistent pricing is essential to preserving a customer’s belief in the legitimacy of a particular price point.
Think of it this way: If you spend $10,000 on a bag that can only be acquired for $10,000, you’re a fashion connoisseur and a member of an elite few who can afford to invest in the finer things. If you spent $10,000 on a bag that can also be acquired for bargain-basement prices, you’re not seen as part of that group.
This is the same reason that many airlines let first-class seats remain empty on pricey international routes instead of offering upgrades to boost loyalty: Preserving the perception that eight hours in a flatbed is worth $7,000, while a seat in coach goes for $700, requires the airline to protect the exclusivity of the experience.
Prestige pricing FAQ
Will prestige pricing work for every brand?
Prestige pricing can be successful across various industries and retail market sectors. What determines its effectiveness is whether you can implement a marketing strategy that creates a public perception of premium quality and associates a product or service with high social status.
Is prestige pricing a sustainable pricing strategy?
Yes, prestige pricing can be a sustainable strategy. Prestige pricing best practices include maintaining a consistent price point over time, so if the strategy is working, sustaining it may be less risky than lowering prices.
How does prestige pricing increase sales?
Prestige pricing can increase revenue by boosting profit margins on each sale. In some cases, it can also increase sales volume by elevating your brand image and increasing product demand.
