Premium Pricing involves setting the prices of products higher than comparable products. It is usually used to boost profits in areas where the customer is happy to pay more. Some brands, such as Starbucks can charge a premium price because their entire brand image is based around luxury.Starbucks sets its prices on a simple idea: high value at moderate cost. When people feel like they are getting a good deal for their money, they are more likely to pay a higher cost.
Starbucks appreciates that the mainstream of their customer base is impervious to price, and uses small price rises that everyday customers may not notice to increase margins.
The goal is to use the price increases to guide the customer towards your most profitable product.
Starbucks do not increase the prices of their products with the highest margins. Starbucks raised the price of a tall coffee in order to convince customers to buy a larger coffee size (with slightly higher margins)
How many times have you walked into a coffee shop and decided on a larger cup because there is only 20/30p difference?
How can a company justify these price increases? Well, if you’ve ever been into Starbucks you might notice that they spend lot of time and energy differentiating themselves from their competitors. The design of its coffee shops, the music played and the types of products it sells. They situate themselves as selling luxury and sought after products, as well as being a luxury and sought after brand.