CalculationPrice 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 100
Example (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|
The percentage by which your average selling price exceeds or falls short of a benchmark of average market prices.