How Premiumization Might Help to Enlarge Market Shares
Companies can try to trade up individual brands or their entire brand portfolio to a higher price segment. This can increase profits in a difficult market environment. The strategy does not come without risk, though.
Martin Fassnacht / Anna-Karina Schmitz - November 30, 2020
In today's world, it is becoming increasingly more difficult for companies to sell their products. There are a variety of reasons for this: technologicalprogress, increasingly well-informed costumers, the development of emergingmarkets, and higher competitive pressure overall. While the financialpower of consumers continues to increase globally, their needs are becoming more and more heterogeneous. Many companies have responded to this by significantly reducing their number of brands in order to refocus on their core business. But fewer brands also mean smaller marketshares in certain segments. If companies want to win back these lost market shares or develop new ones, they have to come up with something new.
When does premiumization work?
In highly competitive and saturated markets, premiumization is one of the few growth strategies that are still applicable. However, a brand known to the consumer cannot be slingshot into the premium segment just by raising its price. Most importantly, the increase in price must be comprehensible for customers in terms of additional added value. Otherwise, the consumer is not going to understand why he or she is supposed to spend significantly more money on a well-known product. The added value does not always have to be physical in its nature. What counts is the added value the consumer perceives. Therefore, psychological aspects are not to be underestimated.
Companies will be successful in premiumizing their brands if they manage to move their brands permanently from a low-price to a medium-price segment or from a medium-price to a high-price segment. Within the segments, there is also potential for trading up the respective brand, thereby increasing profit margins.
The path to a higher-priced segment
Within the framework of premiumization, company managers essentially have two options: either they increase the added value of one of their established brands in order to offer it at a higher price or they introduce an entirely new, more expensive brand and add it to their portfolio.
1. Enhancing the value of an existing brand
Trading up an existing brand can be achieved rather easily: with a new design, smaller packaging, further additions or a new logo it becomes clear and justifiable for the consumer to pay more money for the product. However, the premiumization of a brand also involves risks. If the consumer does not perceive the product as more valuable or even sees the change as a dilution of the core brand, he or she will not be willing to pay more money for it. If the added value is not immediately apparent to the consumer and it needs to be explained by expensive campaigns, premiumization will not be in line with the company’s aspired goals due to the additional costs and the significant amount of extra work. It must be thoroughly evaluated as to whether there will be a reasonable balance between the risks to be taken and the anticipated additional profit.
2. Introducing a new product
Instead of upgrading an existing product, a company may introduce a completely new product or an entire new product line. As it requires more effort right from the start, this approach also results in higher costs. For companies it is important not to stray too far away from their own brand core, which is familiar to the consumer. Once this is ensured, managers have three options for successfully introducing a new product: a limited edition, co-branding, or mass customization.
Consumers tend to spend more money on products that are limited in number as they consider them a scarce commodity. In the past, a chocolate manufacturer, for example, launched a new product called "Unicorn Chocolate" which combined several known flavors in new packaging. This limited edition was sold at a price increase of 80 percent. Consumers were willing to pay this higher price, and once this limited edition was sold out in the shops, it was traded online at even higher prices. However, premium segments will hardly be established only by issuing limited editions as these disappear after a while given their limited nature.
Another way to introduce a new premium product is co-branding. This involves marketing your own new premium product together with another higher-priced product. The added value in marketing can also be emotional, symbolic, or ethical in nature like, for instance, a food retailer cooperating with an animal welfare organization. After all, many customers are easily convinced to pay more for a product if it promises a clear conscience. Still, if the strategy involves being associated with a higher-priced product, the challenge for the company is to find a partner company in this price segment that has a long-term interest in joint marketing. However, this approach often fails due to a lack of mutual benefit.
As a third option, when introducing a premium product, companies can offer their buyers customized versions of their desired product. Sports shoes in a unique design or branded with individual initials are particularly popular with suppliers and consumers alike, as it allows them to show off their individuality and creativity while making them reach deeper into their pockets.
Premiumization is no guarantee for success!
No matter which premiumization strategy a company chooses, managers should carefully weigh the ventures involved against the anticipated benefits. After all, the promise of higher profits and enlarged market shares does not come without risks. Entering a premium segment can be expensive for a company and may not create the desired level of impact. There is also danger in premiumization since previously loyal customers might turn their backs on a brand if they get the impression that it has moved too far away from its core.
Therefore, it must be evaluated precisely in advance whether premiumization of a brand is necessary and whether sufficient resources are available for its implementation. However, if the establishment of a new premium brand or the trading up of an existing product succeeds, it may markedly increase sales and profits. Added benefits such as new customers and an escape from the downward price spiral are also not to be neglected.
Tips for practitioners
- Make the consumer the focus of all your considerations! For him or her, it must be quickly apparent what the added value of premiumization is and why, for a known product, the charged prices are now higher.
- Make sure that the new brand or a brand that has been traded up to a higher price segment does not stray too far from the actual brand core. Otherwise, customers may lose confidence in it.
- Before implementing a premiumization strategy think carefully whether this is the right way to go. In the end, the additional profits must outweigh the increased costs!
Literature references and methodology
The premiumization of brands can be a successful strategy as Professor Dr. Martin Fassnacht and Dr. Anna-Karina Schmitz from WHU – Otto Beisheim School of Management are convinced. Analyzing this approach in the Marketing Review St. Gallen, they show that trading up a brand to a higher price segment can offer great opportunities for increasing profit margins – if the decision-makers are willing to take the risks.
Schmitz, A.-K., Fassnacht, M. (2020): Premiumization as a Profit Growth Strategy, in: Marketing Review St. Gallen, Vol. 3/2020, p. 60 - 68
Professor Dr. Martin Fassnacht
Martin Fassnacht holds the Chair of Strategy and Marketing at WHU. He is also Academic Director of the WHU MBA program, Spokesperson of the Marketing and Sales Group, and Chairman of the Advisory Board of the Henkel Center for Consumer Goods (HCCG). Professor Fassnacht is also Strategic Advisor for consumer goods and retail companies. In three subsequent years, from 2017 to 2019, the Frankfurter Allgemeine Zeitung has named Professor Dr. Martin Fassnacht one of the 100 most influential economists in Germany in its economist’s ranking.
Dr. Anna-Karina Schmitz
Anna-Karina Schmitz is Henkel Assistant Professor of Marketing at WHU - Otto Beisheim School of Management. Her research focuses on issues of brand and price management. In particular, she is interested in the management of brand portfolios and the introduction of brand extensions. Among other things, she is concerned with how growth and higher prices can be achieved through the sustainable enhancement of brands and value creation for consumers.