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How Smart Brands Command a Premium Price

Today's consumers want to get the best prices, but offering your brand at a discount can undermine profits and threaten viability. Smart brands utilize strategies to create and sustain a meaningful difference that helps consumers justify spending more. By identifying your audience, understanding your competition, and knowing your brand's meaningful difference, you can ensure that consumers perceive your brand as premium and worth a higher price.

Pressure on pricing is as strong as ever

At the end of The Great Recession in 2011, Nielsen conducted a survey on consumer shopping habits across 51 countries and found that 59 percent of interviewees were reducing household expenses by buying products on sale. Today the proportion of consumers looking for a deal, stocking up, and trading down is as high as ever; there is no going back to pre-recession ways. Be it packaged goods, technology items, or cars, people want the best price they can get.

With the ever-present imperative to grow sales, giving way to consumer and retailer pressure to discount your brand is tempting. However, as outlined in my previous Point of View, "Command A Price Premium For Profitable Growth," doing so undermines short-term profits and threatens the brand's long-term viability. So how do you widen the user base and grow sales without diluting profit? Smart brands figure out ways to command a price premium.

Strategies that help grow premium perceptions

Commenting on a recent survey that found 88 percent of U.S. consumers love store brands, Pat Conroy, vice chairman at Deloitte LLP and U.S. Consumer Products leader, stated that many name brands suffer "from a crisis of the similar," giving consumers no compelling reason to choose their product instead of a store brand. He is right. Millward Brown's brand equity research, BrandZ™, consistently finds that a brand can only justify a price premium if it is seen to be meaningfully different from the alternatives. Creating a perception of difference may seem difficult in today's competitive environment, yet BrandZ finds that four out of 10 brands around the world manage to differentiate themselves to a significant degree.

To create that all-important perception of difference, you need to answer three questions:

  1. Who values your brand the most?
    Not every consumer is price-sensitive. For instance, the Deloitte survey identified four different types of packaged goods shoppers: affluent convenience shoppers who tend to be the most brand loyal (32 percent), super savers (26 percent), planners who buy in bulk (23 percent), and sacrificers who are forced to buy cheaper brands because of budget (19 percent). Price sensitivity also differs by segment, category, and country. How important your category is to people will determine how generally price-sensitive they are, but even consumers within the same category segments will value brands differently. Few will be totally price-driven, and it is your job to figure out how to make your brand valuable enough to reduce the attraction of cheaper alternatives.

    To do so, you need to identify which type of shopper makes you the most money and focus on them. Remember—it is really difficult to be all things to all people. For instance, when it comes to air travel, pleasure travellers are likely to be more price-sensitive than business travellers, particularly on short-haul flights. Ryanair has created a strong business founded on a reputation for cheap flights, but would find it hard to appeal to any but the most price-sensitive of business travellers.

  2. How different does your brand need to be?
    The answer to this question depends on the brand, category, and context. Since most mainstream beer drinkers, no matter how loyal, cannot actually tell the difference between their brand and another on a debranded basis, tone of voice and creative advertising may be enough to build the perception that the brand is worth paying more for. For instance, the Mexican beer Dos Equis decided to stand out from the crowd in the U.S. by employing amusing and aspirational communications via The Most Interesting Man in the World (MIM), "a storied combination of James Bond and Ernest Hemingway." The MIM campaign differentiated itself from typical beer communication, which relied on juvenile humor and girls. Perceptions that the brand was worth paying more for rose and Dos Equis achieved double-digit growth year-over-year in all five years of the campaign, becoming the fastest-growing brand among imported beers.
  3. How can you best create the feeling of difference?
    When thinking about differentiation, it is tempting to think only of tangible, product-based innovation. That type of advantage, while powerful, is often short-lived, but as Mark Murray, Global Consumer Planning and DWBB Director at Diageo, puts it in Brand Premium, "The challenge is to sustain the feeling of difference."
  4. Sustaining that difference is often easier than you would expect, since displacing a well-established idea is very difficult for competitors, and people also equate "first" or "original" with "best." To create and sustain the feeling of difference, smart brands employ the following strategies:

Build perceptions of product superiority
Innovation, the type that produces a step change in product performance, is still the most effective way to build competitive advantage. Tide Pods and Singapore Airlines are good examples of brands that have used product innovation to improve premium perceptions and justify prices. P&G's commitment to innovation paid off in the U.S. with the introduction of Tide Pods—a three-in-one liquid tablet that allowed the new product to gain market share at a significant price premium. To stave off competition from budget carriers, Singapore Airlines is investing $16 million into upgrading its airport lounges to improve customer experience and has chosen BMW to redesign its cabins.

Build perceptions of value

"Just one dose of Tide Original Liquid helps remove food stains better than an entire 40-load bottle of the leading liquid bargain brand." I am sure you have heard similar claims before and for good reason: they work. By framing perceptions of value premium, brands can gain competitive advantage over cheaper brands provided the claim is defensible and not undermined by consumer experience. For instance, in face of competition from cheaper razors, Gillette chose to improve perceptions of value with advertising dramatizing the fact that one ProGlide blade can last for up to five weeks.

Shift the focus
A single-minded focus on functional advantage and value perceptions may be enough to create a short-term boost, but to support the brand in the longer-term you have to build an emotional connection as well. Les Binet and Peter Fields analyzed 880 IPA ad effectiveness award entries and found that more emotionally engaging advertising outperforms rationally based campaigns by a factor of two in terms of profit effects over a three-year time frame.

In the previous POV, I highlighted how Bega cheese shifted the focus from prices to brand values in order to sustain its price premium. Bega staved off intense price competition in the Australian market by emphasizing the authenticity and provenance of the cheese with ads featuring dairy farmers from the New South Wales town of Bega. The advertising resonated strongly with Australian consumers and deepened their affection for the brand.

Even when dealing with price-sensitive consumers or a heavily discounted product category, smart brands can usually create the opportunity to keep a little more profit than other brands. In addition to above-the-line support, they aim to incentivize buyers in ways that do not include direct price discounting, relying instead on added value promotions, layaway plans, monthly payments, and loyalty schemes.

Build premium credibility
Irrespective of how the redesign impacts flyers in-flight experience, Singapore Airlines sends a clear signal that they perceive themselves as a luxury brand by teaming up with BMW. In China, Häagen-Dazs presents a unique, indulgent, and adult ice cream experience, primarily through its retail stores. It justifies a significant price premium through locating those stores in upmarket areas, offering unique desserts, and selling wedding cakes designed to appeal to wealthy celebrities. For Johnnie Walker, special blends and gift packs offer the chance to ask a higher price for their well-known brand. Mechanisms like these are designed to build credibility around a brand's premium positioning, making it easier for consumers to justify why they are paying a higher price for the brand.

Avoid death by a thousand cuts

One of the biggest challenges in marketing is that it is always easier to demonstrate a cost saving than a business opportunity. Simple cost-cutting strategies like introducing more air into chocolate, downsizing or cutting back on service may seem beneficial in the short-term, but such strategies can have long-term negative implications for the brand—incremental changes made over time often add up to death by a thousand cuts. In some cases, changes can also provoke an immediate consumer backlash, as when Kentucky Bourbon Maker's Mark announced it would dilute its product from 90 proof to 84. Faced with intense opposition, its social media CEO Bill Samuels Jr. reversed the decision one week later.

Get the word out

Whatever strategy you pursue to build premium perceptions, you must broadcast your brand's promise as widely as possible. Effective advertising has the power to remind people of what your brand stands for and why they buy it—strengthening that all-important emotional connection. While advertising content should focus on ideas that resonate with high-value consumers, your campaign needs to reach as many people as possible since you cannot guarantee who will buy your brand or when. Strong advertising also ensures that the competition does not set your agenda for you. Audi's recent success in the U.S. came in part because Mercedes and BMW allowed Audi to frame them as "old luxury." Smart brands know what makes them meaningfully different, and they make sure every potential buyer knows what makes them different too.


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