Price premium


Price premium, or relative price, is the percentage by which a product's selling price exceeds a benchmark price. Marketers need to monitor price premiums as early indicators of competitive pricing strategies. Changes in price premiums can also be signs of product shortages, excess inventories, or other changes in the relationships between supply and demand. In a survey of nearly 200 senior marketing managers, 54 percent responded that they found the "price premium" metric very useful.

Purpose

Although there are several useful benchmarks with which a manager can compare a brand's price, they all attempt to measure the 'average price' in the marketplace. By comparing a brand's price with a market average, managers can gain valuable insight into its strength, especially if they view these findings in the context of volume and market share changes. Indeed, price premium – also known as relative price – is a commonly used metric among marketers and senior managers. Fully 63% of firms report the relative prices of their products to their boards, according to a recent survey conducted in the US, UK, Germany, Japan, and France.

Construction

Price premium = / Benchmark price
In calculating price premium, managers must first specify a benchmark price. Typically, the price of the brand in question will be included in this benchmark, and all prices in the benchmark will be for an equivalent volume of product. There are at least four commonly used benchmarks:

The price of a specified competitor or competitors

Average price paid: The unit-sales weighted average price in the category

Average price charged: The simple (unweighted) average price in the category

Average price displayed: The display-weighted average price in the category