How Premium Pricing Can Lead to Accelerated Revenue Growth

Unless your company is deliberately positioned as the low-priced provider in your market, chances are you are not charging enough for your product or services. The vast majority of companies fail to implement an effective pricing strategy that allows them to maximize customer revenue and subsequently profitability. Typically the inability or unwillingness to charge premium prices is driven by a fear that by doing so, they won't be able to acquire enough customers. That is simply not the case.

The Middle Is No Man’s Land:

From both a positioning and pricing perspective, sitting in the middle puts a company in no man's land. More often than not, the most successful companies are those who either position themselves as a premium provider with premium pricing at the upper end of the market, or as the low-priced provider. So, an approach of pricing a product or service in the middle essentially is a lack of a strategy and a lack of conviction around where a company wants to position itself in the market.?

If the organizational decision is to be a low-priced provider fine, but there absolutely needs to be variables at play that enable a company to do this and still maintain healthy margins. Typically, those variables include elements such as competitive differentiators and sourcing or supply chain efficiencies, access to low-cost offshore labor, or an ability to leverage proprietary technology that can drastically reduce operating and delivery costs. None of those things are easy to achieve.

So, for many companies the decision to position themselves as a premium priced provider is a more straightforward and achievable path.?

Being The Premium Priced Provider:

Of course, merely making the decision to charge premium prices for a product or services offering isn't enough. Commanding those prices needs to be backed by an offering and brand identity that is truly superior and higher end than other competitors in the market.??

Developing a brand identity that supports a premium pricing strategy is usually more challenging in a B2B environment than in a B2C environment. But it absolutely can be achieved in both arenas. And like anything, there are pros and cons to a premium price strategy and positioning a firm as the high-priced provider.

Premium pricing pros:

1. Higher revenue for smaller companies that struggle to achieve massive scale
2. Higher profit margins
3. An effective positioning strategy

Premium pricing cons:

1. Lower sales volume, which in a B2B environment can create customer concentration issues.
2. Can be an ineffective strategy in a highly commoditized market with little to no room for differentiation.

The Importance of Value-Based Pricing:

Implementing a value-based pricing model is very important when deciding to be positioned as a premium price provider. Approaches to pricing that include a cost-plus model or hourly rates commoditize an offering and will oftentimes create downward price pressure from prospects who are looking to cut costs and are making apples-to-apples comparisons across providers within a market.

A value-based pricing strategy requires a sales and marketing mindset focused on selling the outcome or value, not merely the product or the service. In addition to creating a higher perceived value for an offering, creating a high degree of scarcity through strong points of differentiation is another means by which a company can successfully implement value-based pricing. Because in a market environment where there are little or no comparable offerings, commoditization disappears and there is little to no need to win based upon price.?

Higher Pricing Can Yield Greater Revenue Growth:?

Several things happen when a company decides to position itself as the higher priced provider within a market.

Number one, the deliberate decision to take a firm stance on their position within a market will create an opportunity for accelerated revenue growth because a point of differentiation has been created. Secondly, a higher pricing strategy means a higher average customer value for each customer that is acquired or retained, and subsequently revenue increases. Lastly, higher pricing typically increases gross margins. An increase in gross margins gives a company the ability to strategically increase its operating expenses specifically when it comes to growth-related and sales and marketing activities. And of course, this increased investment in sales and marketing efforts accelerates revenue growth.

Adopting a premium pricing strategy certainly isn't the only means for greater revenue growth and profitability, but it is a very effective strategy when looking to achieve those outcomes and one that is oftentimes easier to implement than a strategy centered around volume and being the low-priced provider. Perhaps the biggest hurdle to making the shift to being a high-priced provider is overcoming the fear that doing so will make customer acquisition too challenging and detrimentally impact revenue growth. Because when executed properly, that is not the case.

For well-run organizations that can deliver a superior product or service offering, those that have the confidence and foresight to position themselves as a premium-priced provider and win customers based upon the value they provide and not the prices they provide, will find themselves attaining a strong position within their market and become a far more profitable company.

I am the Founder and Managing Partner of Drive Equity Advisors. An investment bank focused on providing M&A advisory support to sellers and acquirers of IT and management consulting firms in the digital transformation space. You can learn more about the work we do at driveequityadvisors.com