Premium Pricing Strategy for Small Business
These strategies will help your small business avoid price pressure and competitor comparisons.
The 21st Century marketplace is vicious. The Internet makes it easier for consumers to research buying options. They hold more power over businesses than ever before and they know it. If that isn’t enough to keep business owners on their toes, increasing competition does.
Consumer spending habits are changing. People are more cost-conscious, thanks to the Coronavirus. Supply shortages have forced many people to experiment with other brands. This research tells us that 73-80% of U.S. consumers intend to stay with the changes even after the pandemic is over.
Brands that once enjoyed high levels of customer retention could see a drop in loyalty.
So, are people still interested in premium-priced products and services?
And if they are, how can you use a premium pricing strategy to increase margins, even in the middle of a crisis?
Let’s find out.
This report from 2019 showed people were willing to pay more for higher quality. They were also becoming more selective about what products they bought.
The COVID-19 pandemic has been a disruptive event. People have lost jobs, taken pay cuts, and remain uncertain about the future. The crisis has completely changed the business landscape.
This recent study from Nielsen shows that consumers now rank value over quality. But these are still the two highest considerations for making a purchase. This is one consumer behavior that hasn’t changed.
People want assurance before they buy, such a risk-free trial or money-back guarantee. They want to know that what they buy is the absolute best option available for the dollars spent. They are also much more likely to buy from purpose-driven brands.
But haven’t consumers always felt this way?
It’s too soon to know what the long-term effects of the pandemic will be. But, 2020 consumer behavior data reminds us what people really want: value and quality.
Small businesses must know their customers better than ever. It’s vital to know what matters to prospects as they make buying decisions. And companies that want to charge more must do a better job of creating an attractive offer.
This is how a premium brand pricing strategy can help.
Finding the Right Audience
Who you sell to is the most important aspect in marketing a premium brand. If you’re targeting the wrong people, your offer will fall flat, regardless of industry.
Consumers will pay more for something if they see the value in doing so. It’s up to you as the business owner to establish exceptional quality to justify a higher price.
Before you can do that, you must know how your target audience defines it.
Learning more about your customers’ buying behaviors provides insight into what motivates them.
For example, if someone tells you they just bought a car, ask them why they chose that particular model. They may tell you they bought it because it gets great gas mileage. In other words, it’s more efficient. It’s also likely that other people in your target market will value efficiency as well.
Through this process, you may discover buying motivations that you never knew existed.
Your target market should also be a good fit for your business. Are they aligned with your philosophy? Do they share some of the same values you do? Is there common ground between you?
This doesn’t mean you have to be best friends with everyone you do business with. But the best customers appreciate your value and will be more willing to pay for it.
Premium Pricing Strategy
The foundation of premium pricing begins with differentiation. You must create separation between your offer and those of competitors. If people don’t see a significant difference, you won’t be able to justify charging them more.
Unfortunately, many small businesses focus on selling features and benefits. They may explain the product’s technology or how much more efficient it is than others like it. But prospects don’t always understand the value of one feature over another.
You make say things like “We have great service,” and “We care about our customers”. But all your competitors are making these same statements. Prospects can’t know if this is true about you until after they have become a customer and given you a chance to prove it.
Instead of telling people why they should buy from you, you must show them.
Here is a step-by-step process to help you do that:
Step 1: Determine what differentiation means in your niche. The first step in a premium pricing strategy is to determine what defines a premium brand in your niche. Depending on your competitors, you may not have to do as much as you think.
Don’t fall into the trap of assuming you know what customers want—ask them. You may be surprised to find they have some concerns or desires that you had not thought of.
Step 2: Create a narrative. Stories are a great way to connect with people. Use them to share why you started your business and how you developed your products and services.
Developing stories around products and services helps show people what makes them special. As an example, sharing that your product contains superior ingredients establishes higher quality. Discussing obstacles you overcame can show people you have mastered a process. Explaining special techniques used to create products or services sets them apart.
Step 3: Create the perception of superior quality. Quality is the foundation of premium pricing.
If you sell a service, you must prove your competence, or expertise. People will pay more if they believe someone is the best at what they do. Don’t get carried away by showing off awards and accolades. Rather, educating people on what you do establishes you as an authority. Provide case studies, testimonials, and customer success stories.
Avoid talking too much about features and benefits. Instead, demonstrate how your product is better than those of your competitors. Remember, it isn’t about being the best. “Best” is almost always subjective. Rather, the perception of being the best is what makes impact.
Never cut corners to reduce costs if it means eroding quality. This destroys the very essence of a premium product or service.
Step 4: Create the perception of value. Everyone wants to get the biggest bang for their buck. To create value, you must be able to deliver exceptional performance or results. Take a look at your top 10 competitors. What promises do they make? What results do they deliver? What can you do to improve on their claims?
Another tactic is to develop multiple offerings with contrasting price points. Price your flagship offer at a premium price while creating a higher-level offer—at a super-premium price—to position above it. This will decrease the price pressure on the flagship product or service.
For example, you may charge $5,000 for flagship offer. But your super-premium version may be priced at $20,000. With this contrast, the price of your flagship offer looks much more reasonable.
Create significant differences in the features of each one. They must stand apart from one another to justify the price structure. Also, make sure you can deliver on your promises. It takes a long time to build a reputation but the slightest mistake can destroy it.
Step 5: Deliver the premium “trifecta”. Premium products and services must deliver functional, technical, and emotional benefits.
Functionality of a product or service refers to its ability to fulfill a basic need. For example, a computer model may meet the customer’s need for speed. A security system may help them feel safe at night.
The technical quality of a product or service is a measure of its features, benefits, and performance compared to others like it. This includes its ability to deliver without errors, glitches, or other issues that may cause inconvenience or delays.
Finally, premium products and services must also deliver on an emotional level. Emotion is the driving force behind purchasing decisions, not logic.
Today, more people want the products and services they buy to evoke feelings. They want products that make them feel safer or smarter. Clubs, memberships, and upgrades are popular because they make people feel important.
They also want to buy from purpose-driven companies that stand for more than making sales.
How can your products and services evoke emotions like these?
Is There a Pricing Formula?
There are many methods for determining the prices. But there is no exact formula for most industries. Research, competitive analysis, and testing are the best ways to set prices.
The #1 Factor in Premium Product Pricing
At some point, you will be tempted to give in to the pressure and lower your prices. It may be because you lose a few sales to a competitor who is selling for less. Or, it could be because a customer you want continues to challenge your price. It may also be that you need to generate income and make a few more sales to hit goals.
By far, the primary factor in setting and maintaining premium prices is mindset. If you don’t believe what you offer is the best solution on the market, it’s unlikely that anyone else will.
That is why research, testing, and experience are so crucial. The information and insight you get from the process gives you the proof you need to support your prices.
We understand how challenging the premium pricing process can be. We’re here to help.
Click here to learn how to create a premium pricing strategy to grow your business.
Until next time,
We equip visionary entrepreneurs and small business owners with the knowledge and resources they need to stand out, communicate their value, and make more profit.