Premiumisation is all the rage but are you maximising the return?

Premiumisation is all the rage but are you maximising the return
5 minutes read

Yes, it’s the not-so-new buzzword to describe charging more for your goods or services. In the past, we might have referred to this as tiered pricing, segment/target/position or differentiation. In essence, many brands are looking to push more upmarket with renewed offerings. Examples include Pets at Home, David Lloyd Clubs and Nvidia (briefly the most valuable company in the world). Others have long since pursued ultra-luxury and exclusive offerings for top clients, such as Ferrari and Louis Vuitton. The ‘premiumising’ trend is relatively new – taking previously ‘homogenous’ or ‘standard’ and seeking higher prices. So, today we look at why premiumisation is all the rage and ask if you are maximising the return.

 

Premiumisation

The classic definition of premiumisation is to increase the appeal of a brand’s product or service. This is usually via an emphasis on quality, a focus on exclusivity or in the development of new features. The objective is to make products or services more attractive to increase the willingness to pay. What has changed in the last 6-7 years is that premiumisation appears to be pursuing those with the money to pay more. In many cases, your core customers can continue to access what they know and love (or need). New offerings and pricing structures are introduced above and beyond what you normally receive. As a result, the average spend of customers increases through a mix of new pricing, propositions and promotion.

 

Following a premiumisation strategy

In the case of Pets at Home, their strategy is to add additional services to the proposition and subscriptions. You can now buy everything from pet food as a subscription to holding virtual consultations with vets via their app. David Lloyd Clubs are investing in new spa facilities, requiring a platinum or diamond membership. Some customers have apparently been asking for additional facilities and appear willing to pay more for the privilege. Similarly, Nvidia have dominated the high-end market for AI chips, data centre solutions and premium computer graphics. However, the key with all 3 of them is that you can still pop in for pet food in-store, swim in the pool on a basic subscription or purchase some mid-tier hardware. The ‘halo’ effect of some of these products and services may also encourage a few to upgrade.

Another brand with a similar, albeit somewhat tongue-in-cheek push upmarket is Louis Vuitton. Sure, they cater for luxury tastes with their range of clothing and accessories, but not everyone gets the same experience. The brand acknowledges that their higher spending customers need a better service to those who walk in off the street or shop online. Despite queues to buy scarves, purses and tote bags, there is scope for more growth. Additionally, this is evidenced by their acquisition of nearly $1bn of prime real estate in New York. As a result, regular clients receive a personal shopping experience in private rooms, a chauffeur to take you to see the newest collection and invite-only events.

 

Are you maximising the return?

In the last reported financial year, the mean disposable income of the richest 20% of households increased by as much (+3.3%), in percentage terms, as the poorest 20% of households decreased (-3.4%). This has returned income inequality to the level before pandemic-era handouts. It therefore makes more sense to pursue a premiumisation strategy right now. The personas and demographics that you target play a factor in how ‘high’ you can go. For example, where Pets at Home is reaching beyond the retail park store, Ferrari has an in-depth customisation programme and you can visit the Ferrari Atelier. One plays to those who want to pamper their pooches and the other spends millions on a vehicle.

Ultimately, the investment is costly. Pets at Home has invested heavily in digital, vet practices and connected experiences. LV is investing heavily in property. Nvidia invests nearly 30% of net income on R&D. David Lloyd Clubs has refitted over 30 clubs so far at a sizeable outlay. Clearly, each of these believes that the investment in pushing quality over volume and exclusivity over wide-availability will yield significantly higher returns. But, will they?

The Pets at Home share price is roughly 40% below its peak at the time of writing. David Lloyd Clubs was bought for £750m back in 2013 and a buyer has so far eluded them at a heady asking price of £2bn. New memberships are up 3.5% but how much of that is down to the premiumisation element is unclear. LV and Nvidia are clearly doing exceptionally well, with premium luxury and a wave of AI innovation driving superior returns.

 

How to maximise the return on premiumisation

While it is impossible to fit a complete guide into the conclusion, we do have a few thoughts. The premiumisation journey is often long and requiring substantial investment. It must be based on hard, tangible insights into customer wants and piloted until the right formula is found (the scientific method). It needs oxygen to take off, building brand equity by increasing awareness and improving perception. Desirability, exclusivity, quality, innovation and a clear proposition at every price point is key. The financials must also make sense, with whatever strategy having a clear plan and metrics along the way. Existing customers must not be forgotten, as businesses often make the bulk of their profit from a volume base.

In the end state, you want a high volume of people demanding your wares or experiences. These are served in different ways, with varying costs to serve, pricing, experiences and availability. Entry-level buyers get the lowest cost-to-serve and the most available products (such as a high-volume tote bag) and experiences (such as queuing in a luxury store). Top-tier buyers get access to strictly-limited volume stock with exclusive pricing (as in high) and a curated experience (made for you) at a high cost-to-serve.

In the tech space, the entry-level bears resemblance to competitor products, is accessible and affordable(ish). The top-tier get the bleeding edge of equipment, on the latest manufacturing process, paying top dollar. However, saying it and getting there are two different things. We would be remiss without referencing visionaries in their fields, often leading such entities and raising brand profile. Curating a desired perception is a studious journey requiring long-term effort and focus.

 

Premiumising your offerings

Think Beyond works with both B2C and B2B businesses to achieve their targets, overcome challenges and grow profitably. We support clients with strategic planning, research and insights, assurance and more. Our neuroscientific solutions help you to measure, monitor and improve brand perception (neurobranding), as well as increasing the success of your communications (neuromarketing). We also use research, process mapping and neuroscience to enhance customer experience scores. So, if you are just starting out on the premiumisation journey or are well on the road, let us help you maximise the return.

If you would like to get in touch, why not drop the team a short email (a human will answer) or request a service online. Alternatively, why not check our website for more details.

Finally, why not read a related article about measuring and managing your CX.