Premiumization: Welcome To The World Of Specialty Doughnuts
Over the past two years, brands raised prices at record rates. In fact, many brands raised prices every quarter over the past two years. Consumers are starting to push back. But, brands, conscious of their margins, are finding ways to raise prices in, shall we say, more creative ways. If the last two years has taught brands anything, it is to be profitable at any cost, even if it is not in the best interest of the customer. Maintaining margins is the rallying cry. And, after all, margins are all about profit.
Now that brands are realizing that there may have been one price hike too many, one of the most creative ways brands are using to protect margins and grow profit is called “premiumization.” According to The Wall Street Journal, the concept of premiumization was mentioned “… in nearly 60 earnings calls and investor meetings over the past three weeks.”
What is premiumization?
Premiumization is a euphemism for higher prices. Premiumization is a way to justify high prices by covering the offering in a coat of high-class, elite status. Brands are selecting certain items and offering these at higher prices hoping the patina of exclusivity and highest quality give customers a reason to buy. At the same time, brands are culling portfolios to eliminate low-margin offerings.
Premiumization may lull brand leaders into thinking their high-end offerings are now perceived to be extra valuable because the price is high. The etymology of the word premium says otherwise. Premium comes from the Latin word for booty, that is, valuable stolen goods, especially those seized in war. The roots are “before” and “buy,” as in caveat emptor, let the buyer beware.
To be premium is to add a cost to something; sell at above the usual price; regard or treat as particularly valuable or important; have an element of scarcity; and be a reward. Premiumization is the epitome of these definitions. But, basically, brands are just finding a way to lure customers to paying higher prices. This is one of the reasons why marketing is derided. Find a way to sell what we make by telling customers the offerings are not only special but for special people.
Channel the Consumer Cellular advertisement with Ted Danson, when a confused customer wants to understand what makes a competitive brand better than Consumer Cellular. The salesperson shows that the competitor’s cellular coverage of the US is an all purple US map. Ted Danson tells the confused customer that this just means the brand is more costly, but not any better. The salesperson says purple means premium. Ted Danson indicates that the brand with the purple map is “me too, but more expensive.” This is premiumization.
Is premiumization here to stay?
It is unclear as to whether premiumization will last. Economists point out that trying to maintain profit margins while polishing particular products with a patina of premium-ness may not provide the expected results. What does appear to be clear is that brands believe premiumization will maintain the large profits reaped over two years of extreme price increases. This is what The Wall Street Journal opines as possibly a last ditch effort to show a profitable balance sheet.
Disney tried premiumization under previous CEO Bob Chapek. Not only did Mr. Chapek raise prices at Disney’s theme parks – already an expensive experience – he monetized services that were free to loyal customers (those with annual passes) and hotel guests. Loyalists and hotel guests became vocally livid when Mr. Chapek started charging high fees for parking. Free parking had always been a perk for loyalists and for hotel guests. Needless to say, after Mr. Chapek’s ouster, new CEO Robert Iger walked back many of the increased prices and reversed the parking back to free for those staying at Disney hotels and for loyal customers.
The Wall Street Journal points out that increased fees at Six Flags amusement parks has garnered less than stellar results even though Six Flags’ CEO stated that higher prices were “… a bold change to our business model in order to elevate the guest experience.” Honestly, the customer does not give a damn about a brand’s business model. If the price is too high, the guest may decide the brand is no longer a good value. Which, it appears, is what has happened at Six Flags. Sure, spending per guest rose. But, over the course of the past nine months ending in September 2022, attendance fell 25% versus the previous year. And, profits fell almost 10%.
Wall Street was wowed when Campbell Soup Company showed a 12% rise in sales based on 14% higher prices. Overlooked is that volume dropped 2%
Molson Coors, the giant beer and drinks company, aims to grow market share through innovation and premiumization. It is one of the companies zealously focused on its premium portfolio. In its earnings call, Molson Coors signaled that it is evolving its product portfolio towards premiumization.
One of those premium offerings is hard seltzer. However, despite its strategic intent, Molson Coors continues to experience lower brand and financial volume. In third-quarter 2022, Molson Coors’ worldwide brand and financial volumes fell 2% and 0.2%, respectively.
Beam Suntory, the American-founded, Japanese spirits company, is also focused on high-margin offerings. In its earnings report, its CEO and president, Albert Baladi, said, “The quality of these results is clear and reflects our strategy to premiumize (sic) our spirits portfolio, build RTD (ready-to-drink) leadership and focus on value over volume.”
How are consumers reacting to the premiumization trend?
Some premiumization comes across as a stretch or an SNL sketch. Krispy Kreme will move away from discounts and focus on arousing excitement around premium doughnuts. These specialty offerings are considered “fancier, higher-priced and holiday-themed.” The ubiquitous lubricant WD-40 considers the little red straw on the top of cans to be a premium offering and thus sells that package at a premium price. Apparently, the ability to spray oil with both a precise stream and a mist is premium.
Credit cards have offered premium cards for many years. Yet, now, American Express stated that it is more cautiously reviewing to whom they extend the membership of its cards, including its entry Green card. Airlines have been leaders in offering services with fees attached. Want legroom? Pay a premium. Hotels mimic the airlines in charging fees for everything even if a guest will not be using that service, such as beach towels or gym usage or resort fees.
Putting the potential economic and social issues of a divided society aside, this approach of hiding price hikes behind the curtain of premiumization has the potential to backfire on brands. As brands tend to focus on price, the risk is that the brand’s value may come into question.
Value is more than price point. Even higher income individuals have a value equation in their mind. A brand’s value is based on an internal assessment of the total brand experience (functional, emotional and social benefits) relative to the total brand costs (price, time, effort). At some point, that specialty doughnut may not be perceived to be a great value anymore. Worse yet, that specialty doughnut may become a novelty.
Brands need to reckon with the idea that by focusing on those who can afford high prices, the core customer base will become smaller. Focusing on fewer customers who can pay high prices may be good for some brands, but big brands cannot afford to lose significant parts of their customer base. Making money on fewer customers is not a good long-term strategy, unless you are Ferrari or Hermès. What will you charge those last few customers? Making money by alienating current core customers is a dicey strategy. Brand owners must recognize that there must be both quantity of sales and quality of sales. Sales based on higher prices with lower volumes are dangerous.
Is the premiumization trend a risky play for brands?
Value begins with the customer: value is not determined by the brand leaders or the CFO. Although brand leaders believe they are value creators, they are not. Brand leaders help to create brands to which customers ascribe value. Brand leaders determine pricing but not value. Instead of deciding what to charge, brand leaders should determine if the price they are asking will be a customer-perceived fair value.
Finally, customers are not stupid. Customers know when they are being played for profits. Marketing is all about profitably satisfying customer needs. Brands need to determine whether the customer’s needs are addressed so that the brand is perceived to be a good value. Brands can be perceived as good value at any price point. Marketers must aim their brand to be best values at whichever price point they choose.
Premiumization is charging more to maintain margins. This is a dressed-up version of financial engineering. If the only way a brand can maintain margins is by becoming a premium brand or by offering multiple premium varieties, then risk ruining the brand’s value perceptions. Because this is a fact: there is no shareholder value without customer value. A brand needs quality revenue growth for enduring profitable growth.