How to Use Prestige Pricing to Increase Your Recurring Revenue

Henry Mathias
How to Use Prestige Pricing to Increase Your Recurring Revenue

So, you want to increase your monthly recurring revenue? One of the easiest ways you can do that is by switching to prestige pricing. A psychological pricing strategy, prestige pricing will not only help you obtain higher profit margins, but it will also improve your brand’s value — an essential asset for long-term business success.

What Is Prestige Pricing?

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Prestige pricing, otherwise known as image pricing or premium pricing, is a marketing strategy that involves pricing products or services at a higher cost than usual to give consumers an impression of higher quality.

Fashion, luxury, and technology companies often use this pricing technique. Brands like Apple, Rolex, and Nike rely on prestige pricing to bolster their “image” and their products’ desirability. As Matt Powell, the senior industry advisor for the NPD Group, said in an interview with Business Insider about Nike, “There’s this prestige factor. If I can buy a pair of LeBrons [Nike shoes endorsed by LeBron James], it means I’ve got $175 — and you don’t.”

In some cases, brands may also use prestige pricing on a few product lines to make their other lines look like a better deal.

The Psychology of Prestige Pricing

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Prestige pricing can give brands a psychological marketing advantage by convincing buyers that there’s added value to be had for an increased cost. Customers often equate higher prices with superior quality, even if an item that costs significantly less is of similar, if not identical, quality to one that costs much more.

This flawed logic is highlighted perfectly by a 2017 study. As part of the study, participants were asked to taste wine while lying down in an MRI scanner. Notably, while all participants sampled the same wine, they were told differing information about its price tag.

Interestingly, participants who thought they were given more expensive wine said it tasted better than the one they thought was the cheaper one — and their MRI results confirmed this. There was increased activity in the part of the brain linked to reward and motivation when they sampled more “expensive” wine, which apparently improves the taste experience.

Luxury companies purposely avoid low prices because they can negatively impact the perceived value of the brand.

In 1990 Tiffany & Co introduced a cheaper jewelry line to appeal to a younger and less affluent audience. While sales skyrocketed, managers soon grew worried that the brand would lose its reputation for luxury, and in consequence, the loyalty of its wealthier customers. One high-end shopper said, “I don't wear them [Tiffany & Co] anymore because everyone wears them now. You used to aspire to be able to buy something at Tiffany, but now it's not that special anymore."

As a result, in 2002, Tiffany & Co increased its prices on cheaper jewelry, introduced pricier jewelry collections, and renovated its stores to include private viewing rooms stocked with chilled water and champagne.

How to Incorporate Prestige Pricing into Your Recurring Revenue Business

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You don’t have to be a luxury brand to take advantage of prestige pricing. Smaller retailers can just as easily incorporate this pricing model into their business.

Evaluate your customer base

Whether or not you should incorporate premium pricing into your offering depends mostly on your customers’ demographics.

If the majority of your customers are price-sensitive already, there’s no point in upping your prices. Failure to do proper research before leveraging prestige pricing can lead to some of your current customers abandoning you.

Improve the perceived value of your brand

People don’t buy luxury cars to get from point A to point B, nor do they purchase Rolex watches to tell the time. Instead, they pay higher prices for these luxury items because they are a status symbol. The value is in the brand — and its image — and not in the item’s actual functionality.

However, you need to be consistent with the promises you make to your customers. Marketing yourself as a premium brand is all well and good, but if your products or services don’t live up to customers’ expectations, you’ll be pegged as “expensive” rather than “premium.”

Create a premium product/tier

Consider launching a new product that specifically targets the top of your market. This approach won’t impact your current customer base but might allow you to tap into a new market.

If you’re offering a SaaS service, consider adding a “premium,” “professional,” or “enterprise” tier to your pricing page. This premium tier should offer a few additional features or qualities that justify the price, like unlimited users, extra storage, or a 24/7 customer support service.

Similarly, if you’re selling physical goods, why not introduce a luxury line? Alternatively, you could also offer special edition products. Nothing says “exclusivity” like a limited supply of something. Subscription box services have nailed down this technique that relies on the scarcity principle. Look at how the beauty products subscription service BitchBox offers limited edition boxes that cost more than regular boxes.

Use round numbers

An important part of prestige pricing is rounded numbers, i.e., $200 instead of $199.99. The reason you want to use round numbers is that prestige pricing relies on customers making emotional, not rational, decisions.

According to a 2015 study, “a rounded price ($100.00) encourages consumers to rely on feelings when evaluating products, while a non-rounded price ($98.76) encourages consumers to rely on reason. When a purchase is driven by feelings, rounded prices lead to a subjective experience of feeling right.”

Also, a price that involves cents implies cheapness. As a premium provider, you don’t want potential customers to have that association with your brand.

Run tests on conversion impacts

Deciding on the best pricing plan for your product or service is just half the battle. You also need to do price testing to determine if your prestige pricing strategy is working.

After carefully reviewing the data from price tests, you may find that your prestige pricing strategy is too aggressive, leading to a high churn rate. Or, you may discover that your customers are willing to pay even more for what you’re offering.

Is Prestige Pricing Right for You?

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Setting your prices as low as possible may seem like a sound business decision. However, it’s worth remembering that people are naturally suspicious of low prices. By using prestige pricing, you can grow your recurring revenue while also improving the perception of your brand’s quality, which can help you fend off competitors in the long run.

Regardless of whether you decide to go for prestige pricing or some other pricing technique, it’s essential that you have the right payment provider in place. With TillyPay, you can create professional checkout pages that integrate into your brand’s image. Our platform's recurring revenue support also allows you to gain a better insight into your cash flow.