Companies utilize various pricing strategies when marketing their products to customers and one of these pricing strategies is Prestige pricing. Pricing is one of the most important P’s of the marketing mix.
Generally, in order to identify the optimum price, marketers will take into account labor, production costs and advertising expenses. Once these costs are considered, then the company can keep a minimum profit mark up. However, several companies prefer to adopt a prestige pricing strategy, as they count on the idea that ‘’expensive’’ is perceived by customer as “high quality”.
For example – If the cost price of an Adidas product is X, then the market price might be X + 50%. Adidas can keep the price at X + 20%, but then the price range will be equal to Puma, which is a lesser reputed brand. Hence, to give the impression that Adidas is really premium and that its products will be premium too, Adidas keeps the price as X + 50%. The day Adidas drops prices, it will slowly start losing its brand image too.
This method is also encountered under the name of image pricing or premium pricing, and is utilized by companies with the scope of fostering the impression that they sell a high-quality product.
Prestige pricing has a direct correlation with the brand and the perception of the customers over the image of the company. If the customer values the brand and is satisfied with the features of the product over the competitor’s product, then the company can take advantage of prestige pricing and capture value, in spite of quality or low production costs.
This concept is based on the assumption that the customer will pay higher prices for the right image, and actually they will not research whether the price reflects the value or not. The high price is used as a marketing strategy by convincing the customer that there is value added to the costs. Basically, the companies rely on the customer’s presumption that their product is of higher quality than those of their competitors because of the higher costs.
For instance, when Rolex is selling a watch, is actually not selling just a time device but also the value of displaying the customer’s financial wealth. Nevertheless, the consumer can choose to buy a Timex watch, which has the same functionalities as a Rolex – showing the time – or maybe even more, for a ten times lower price. However, Rolex takes advantage of prestige pricing, as the value is in the brand and not in the functionality of the device. By doing so, the company reinforces the perceived value they offer to the customer.
A heavy discount in case of prestige products, could actually hurt the sales, and create a negative impact on the company’s image. On the other hand, to maintain a prestige pricing, these companies have to invest heavily in marketing and brand building exercises. Where other companies might have a 4% budget of marketing, Prestige priced products might have a budget of as high as 10% of the product value.
Prestige pricing is of the psychological order, and is particularly addressed to a niche segment of customers, who associate high prices with superior quality. These customers are the ones who feel that by owing a high-end, expensive product, they fulfill the desire of higher social status. Thus, the companies keep deliberately high prices for their products in order to encourage favorable perception among customers.