Prestige pricing is a pricing strategy where products are priced at a high level to reflect the premium or luxurious image of the brand. In this pricing strategy cost does not play a role in determining the price, but rather the brand’s target market and its perception among consumers.
When Should Prestige Pricing Be Used?
Prestige pricing should be used by luxury brands to maintain the aspect of exclusivity, which makes it appealing for its target customers in the first place. Failing to maintain this exclusivity through higher price points might be detrimental for such brands that want to be perceived as “luxurious“.
Prestige Pricing Case Study
A few years ago, Michael Kors and Coach were facing major brand positioning challenges that have hurt the brands’ image and made them less appealing to their primary target market.
These brands went on an aggressive expansion strategy, in which they tried to be more accessible to more people, by putting their products at a lot of department stores that have then exposed those products to a lot of discounts.
Such an overexposure started hurting the brand image of those two brands, that were supposed to be among the luxury segment, where exclusivity and scarcity is key for success.
They then backtracked on such strategy and started pulling off their products from such stores and excluding their products from storewide discounts and promotions.
Prestige Pricing Example
Let’s take a very simple product that can be offered by any fashion brand at any market segment: a Polo shirt
The price of a regular 100% cotton, polo shirt at department stores will be in the range of 15$ – 20$.
Premium brands, such as Tommy Hilfiger or Lacoste might sell such a shirt at 40$ to 100$
Luxury brands, such as Burberry, will sell this shirt at 350$.
The cost price for all the shirts is more or less the same. The difference will not be that big in quality or cost.
The main difference, though, is the brand name and image. This is also the value that it gives to the customer who goes and buys this shirt for the sake of its branding.
The customer knows that by paying such a high price, he is getting access to an exclusive brand that only few people will have access to. And so by reducing the price of such brand in the future, this exclusivity factor will vanish and the brand will lose their primary customer who paid the high price to help the brand maintain its scarcity in the first place.
Does Higher Price Mean Better Quality?
Higher price does not necessarily mean better quality, and in case of prestige pricing the increase in price is not directly correlated with quality improvements. It is expected of premium and luxury brands to be of high quality, but the quality improvement will have a ceiling, and yet the price can still go higher with higher brand value or perception.
Download our Pricing Blueprint and learn how to price an entire product portfolio of different categories.
Prestige Pricing Considerations
There are certain pricing considerations to be taken into account while implementing prestige pricing.
Target Market & Demand
If you are targeting a wide audience and your strategy is to sell high volume, then prestige pricing might hurt your business.
As we have shown here, the main idea behind prestige or premium pricing is to maintain exclusivity and sell to fewer customers. This reduced number of items sold is compensated by the high gross profit margin on each piece that it sold.
In order to succeed in such strategy, your brand name and image should reflect and communicate such premium status. This would automatically mean that a lot of other customers will be priced out of your products.
It will be very difficult to try and appeal to everyone by having products at high price points and other products of the same brand at lower price points. In fact, this is exactly the mistake Michael Kors has fallen into and later on realized that it was hurting its primary business as a luxury brand.
So, in order to implement such strategy, you first need to define your target market and focus on it.
Long Term Commitment
Another thing to consider is that adopting this strategy is a long term commitment. Once you have positioned your brand to be perceived as premium or luxury, you will have to stick to it, and all your marketing and branding activities will have to reflect it.
If at any point you decided that such positioning is not for you and that you would rather appeal to the masses, then the best thing to do is a “rebranding”, rather than just reduce your prices.
If you just go ahead and price at lower levels under the same high-end brand that you have marketed to the customers for a long time, it will create a confusion in customers’ minds about what your brand really stands for.
You might actually lose both, the customers you have acquired under the premium/luxury positioning and the customers you are now trying to appeal to under the value positioning.
Markdowns & Inventory Management
Applying this strategy means that you will lose the ability of applying deep discounts, markdowns or a price skimming strategy, which is a very powerful weapon used by retailers to manage their inventory.
This will require you to be very careful with your demand forecasting and inventory buying from the start, so that you will not end up with high inventory levels at the end of the season.
Read Also: Open to Buy
If you are left with excess inventory at the end of the season, you will need to come up with creative ideas to clear such inventory, without hurting your brand image in the process. In some cases you might even have to resort to writing off this inventory completely and damaging it, so that it does not get out on the market and get sold at a discount by other people.
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Retailer & Founder of Retail Dogma, Inc.
Rasha has 12 years of retail & ecommerce experience. She has started an ecommerce business in 2008, and later worked at H&M, Bath & Body Works, Victoria’s Secret and Landmark Group. She has lived in 4 different countries, speaks 3 different languages and holds a master’s degree in Strategic Management & Marketing.