At university, I learned an important lesson on pricing which blew my mind. And it’s stuck with me even today. As a brand, lowering prices maybe a quick short-term fix but can harm you in the long run. How? The short answer is brand equity. Brand equity may be defined as the value of your brand or the perceived value generated by consumers of your product. Positive brand equity helps you maintain a premium pricing model for your product, generally higher than your competitors.
My Life Lesson
Let me give you my personal experience on the subject. One of my marketing courses at university had the infamous Markstrat simulation, which is a software that allows you to test important marketing theories under real-market conditions. And even better, with zero risks of losing actual money.
The idea behind the simulation is to help you learn from your successes or failures made across ten rounds of a new product launch into a simulated market. It involves various decisions on a new product launch like marketing decisions (production, advertising budget, number of channels, and salespeople), pricing decisions, R&D decisions, and marketing research decisions.
The first round involved most teams dropping their prices to rake in revenue and market share. However, over the course of the next few rounds revenue and market share continuously depleted as customers perceived our products as low-quality, which meant poor brand equity and bargaining power.
I quickly realized the importance of brand equity within the market. It is evaluated across four major dimensions, namely, brand loyalty, brand awareness, brand association, and perceived brand quality.
Research Driven Formula
According to an article published on Economics Help, “premium pricing is a marketing tool to set higher prices for certain goods in the hope that the higher price will give the impression the good is of a higher quality.”
Rolex is a great example of a premium brand using this powerful pricing strategy. Think about it. If all you need is an instrument to tell time, you can buy a Timex watch for $50, but as global consumers, we only want the best (what we perceive as high quality) goods at our disposal, like a Rolex for $10,000. It’s almost like a status symbol.
Another good example could be cars. Say you need to get from point A to point B. As consumers, we can tackle this situation by either purchasing a Toyota for $25,000, which is cheap and reliable or choose to buy a Bentley at $250,000 for the same journey. The Bentley is perceived by consumers as a “high quality” car and most likely favored over the Toyota.
Premium Pricing Strategy
The strategy involves tactically pricing your brand’s product higher than your immediate competition. The idea behind this pricing is to cultivate a sense of your product being better in quality than the rest in the market. Your marketing strategy must align and boost this perception as well.
Premium pricing is actually the inverse of the price skimming strategy, as it involves setting high prices and maintaining them there. In order to perform it right, here are a few tips to help you.
Showcase value — demonstrate your product’s value to the customer and why it’s worth the extra dollars.
Highlight features — identify and highlight the USP of your product across your marketing channels.
Financial stability — customers want to know that the company will be around for a long time. It’s part of the value image.
Loyal customer incentive — don’t reduce prices, but incentivize your loyal customers by offering a small discount (sometimes, if necessary).
While it may seem tempting to focus on highlighting the weaknesses of our immediate competition, brands may find more success in creating value for consumers with their products. And making it worthy of the higher price tag.
I believe that being able to successfully launch a premium pricing strategy for your brand can be challenging. If done right, it can generate higher profit margins and improved public perceptions of your brand. And in the process, create a loyal fanbase of consumers.
However, success with the premium pricing model is dependent upon the context of your product. It requires a matrix of factors to be working in alignment for this strategy to tick, which could also be one of its major drawbacks. And what I mentioned above as benefits can also be viewed as cons for the same market.
Creating a brand with a “high-quality” image takes time, money, and effort to nurture. Your entire marketing strategy and messaging should project a high quality, which helps consumers believe it is so. They must also be convinced that your product is worth every dollar.
With all these elements working together, you have yourself a brand worth all the chatter and hype. Positive brand equity will be your ultimate driving force behind your increasingly growing revenue.
Article originally published to Medium
Written by Nitish Menon