By Cesar Perez-Carballada
Premium Brand and Price Premium are two concepts that we use frequently in marketing but we rarely stop to reflect on their real meaning, which sometimes causes confusion and creates hopeless discussions.
Perhaps the confusion arises due to the fact that both concepts include the word “premium” which leads many people to think, erroneously, that they are the same thing. They are not. For instance, a brand that competes in the mid-tier segment, with low prices, is not a Premium Brand, even if it can command a Price Premium vs. a similar brand. Confusing both terms can be dangerous and can lead to loss of market share.
There other related questions: how much Price Premium can we charge? And how do we make our products able to command Price Premium in the first place?
DEFINITIONS
First we must define Price Premium and Premium Brand:
Collins dictionary (1) defines Price Premium as “a higher than standard price for a good which is perceived to be of higher quality than standard”. Millward Brown, the research agency, defines it as “the additional price that a brand could charge compared to an equivalent, generic product (…) the price that a brand can command over its closest competitor, assuming that the two have similar product specifications.” (2)
As we can see, these definitions don’t restrict Price Premium to the most expensive products: any product can potentially command a Price Premium. How much? One study (3) found that more than 72% of customers are willing to pay a 20 percent premium for their brand of choice relative to the closest competing brand; 40% said they would pay a 50 percent premium. However, in the end, it depends on the strength of the brand. Volvo users are willing to pay 40 percent premium, loyal Coke drinkers 50 percent, and Tide and Heinz lovers are willing to pay a 100 percent premium! (3). If we want to know the Price Premium of our brand, one way to calculate it is via a Conjoint Analysis.
Now we can define Premium Brand. Surprisingly, there are not many sources that formally define the term: it seems that even when everybody uses it, almost nobody has stopped to formally define it. There are two approaches to define premium, firstly, market research firms (as Nielsen in consumer goods, GfK in TV sets or Strategy Analytics in smartphones) aggregate all the brands in a certain category in segments according to their prices and they label the most expensive group as Premium. In this way, a brand or product is premium if it belongs to the most expensive group of brands in a given category. Secondly, some surveys have asked consumers how they define a Premium Brand and, remarkably, only 31% say price is the key defining element. Instead, consumers relate a Premium Brand not only to a superior price but also (and to a higher degree) to an exceptional performance (4) and the highest quality, expressed via its ingredients, packaging, image or even in-store theatre (5).
In reality, both approaches are right since price and performance are two sides of the same coin. Thus, we define a Premium Brand as one that competes in the premium segment (top-of-the-line products) which has both a superior price and performance. We can illustrate this concept visually by using a framework called “Value Proposition”, which we have used in prior posts. As we can see in the next chart, the framework has two axes: the vertical one refers to the product’s benefits and the horizontal one to its price. Just to illustrate it, we have added automotive brands in Europe.
The vertical axis refers to the benefits of the product for the consumer, which includes a combination of functional and emotional elements because consumers make decisions based both on the functional characteristics of a product (a logic and rational process) and on the symbolic meaning of the brand (a highly emotional process).
Most products will be placed close to the regression line because ‘benefits and ‘price’ are in general correlated: the more benefits a product offers, typically the higher its price is. There are also clusters of brands in areas of similar benefit-price levels, which represent the ‘tiers’: low-tier, mid-tier, high-tier and premium.
In the real market, this correlation between benefits and price is not perfect and some brands deviate from the trend: if a brand offers superior benefits at the same price (see case A in next chart) or the same benefits at a lower price (case B), then that brand will gain market share due to its superior value proposition. The inverse is also true: any car below or to the right will tend to lose market share due to an inferior value proposition. In general, brands above the “regression line” will tend to gain market share, and those below the line will tend to lose market share.
Consumers are willing to pay more for a product (Price Premium), even when it’s functionally similar to another one, if its emotional benefits are superior, making it a better choice overall.
For instance (see next chart), the Volkswagen Golf Plus 2.0 TDI may have similar features (functional performance) than the BMW 118d but the brand BMW has a superior symbolic meaning over VW Golf, therefore BMW has three options: (i) charge a similar price to the VW Golf (around 27,000 €)(6) and sell more units (gain market share), (ii) raise its price to sell the same quantity as VW but collecting the extra profits (increased profitability), or (iii) any combination of the two prior options.
Option (ii) reflects the Price Premium that BMW commands over VW due to the symbolic emotional meaning of its brand.
In summary, as we can see I the next chart, while only top-of-the-line brands are considered Premium, brands at every price level can command Price Premium over similar products, as long as they have a differentiated positioning (symbolic emotional meaning). Actually, the ultimate role of a strong brand is to develop such positioning so that it can command a price premium over comparable products.
IMPLICATIONS
Having covered the basic concepts, we can now discuss two implications which are important for the day-to-day decisions: (1) although it may sound like a misnomer, not all Premium Brands can command a Price Premium, and (2) we don’t need a Premium Brand to charge Price Premium.
(1) “Not all Premium Brands can command a Price Premium”
As we can see in the next chart, in the premium segment (top right) a product can have both a Premium Brand and a Price Premium. For instance, a BMW 335d might have a similar functional performance that the Volkswagen Passat 3.6 V6, but BMW is able to command a higher price, approximately +10% (6) due to its brand’s superior symbolic emotional meaning. Only in the premium segment the two elements (premium brand and price premium) can co-exist because in the other tiers the brands are not, by definition, premium. However, not every brand that competes in the premium segment can command Price Premium: VW Passat cannot do so vs BMW even when it can be considered a Premium Brand.
(2) “We don’t need a Premium Brand to charge Price Premium”
As we can also see in the prior chart, brands in any price tier can command Price Premium. If a product competes in the mid-tier (bottom-left) and thus it’s not the best performing in its category, it can still command a higher price vs. other mid-tier products as long as its brand has higher emotional associations than its competitors. For instance, Volkswagen Golf is not a premium brand however, consumers are willing to pay more for it than for the Seat Leon (which –functionally- is almost identical since they both share the same platform, components and engine)(7), therefore we can say that VW Golf commands “Price Premium” vs. the Seat Leon, although it’s not a Premium Brand.
*****
Confusing the terminology can take you in the wrong direction. Now you know that you can charge a Price Premium at any price point, and to do so, an emotional branding is required. Finally, don’t assume that because your product competes in the premium segment your product is automatically entitled to Price Premium vs other products in that segment: you still need to earn it.
___________________________________________________________
- Share here you opinion of this article
- Send this article by email
___________________________________________________________
Sources:
(1) Collins English Dictionary, HarperCollins, retrieved on March 6th, 2018
(2) “Command a Price Premium for Profitable Growth”, Nigel Hollis, Kantar Millward Brown, May 20, 2014
(3) Marketing: An Introduction (7th ed.). Armstrong, G., & Kotler, P. New Jersey: Pearson Prentice Hall. 2005
(4) “Moving on up”, Nielsen’s survey in 63 countries (n=30,000), December 2016
(5) “The Brand Challenge”, Shoppercentric’s survey the UK (n=1000), March 2013
(6) “Cars of Europe”, retrieved on December 3, 2017
(7) “SEAT, Skoda and Volkswagen: what’s the difference?”, Hugo Griffiths, Carbuyer, September 2nd, 2016
___________________________________________________________
Author: César Pérez Carballada
Article published inhttp://www.marketisimo.com/ Continuar leyendo el resto del artículo...
