Calculation
Price premium requires a benchmark of average market prices for comparable products to your own. This can be calculated from a basket of similar products. It is also common to use a single close competitor or price umbrella as the benchmark. Price premium is calculated as:price premium = (price - benchmark price / benchmark price) x 100Example (1)
An organic coffee product is priced at $12. Similar products had an average price of $10.50 in the past month.Price premium = (12 - 10.50) / 12 x 100 = 14.3%The firm tracks the price premium over time and has found that it has been increasing due to discounting by competitors. The firm decides to decrease prices modestly.Example (2)
A hotel with a slightly worse rating than other hotels of similar quality in central Hong Kong charged an average of $200 USD for a 23 square meter room over a three week period. They estimate that a more popular competitor charged $300 USD over the same period.Price premium = (200 - 300 / 300) * 100 = -33.3%The hotel decides they might be able to charge slightly higher prices going forward and maintain a reasonably high occupancy rate.Example (3)
A telecom service in Belgium offers the highest quality colocation services in the country. In a particular quarter their sales team exceed their sales quota by 10%. Management checks the price premium and finds that it declined from 30% to 2% in the quarter. They decided that the sales team only met the quota by over-discounting. In the following quarter, they introduce new rules and an approvals process for discounts.| Overview: Price Premium | ||
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Definition | The percentage by which your average selling price exceeds or falls short of a benchmark of average market prices. | |
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