Consumer trends are behind the increasing levels of premium products across almost all categories. But what is a premium product, and why are they valuable for manufacturers?
What is premiumisation?
In a consumer products context, premiumisation is about taking an existing category and offering consumers an alternative “superior” product that gives the consumers more or better benefits with a higher price tag. Think about detergent liquid tablets versus traditional powder, or whitening toothpaste versus standard toothpaste. Justification of this premium position varies by category, but is usually driven by:
- Better ingredients (e.g. organic, healthier, high protein, gluten free, vegan, sustainably sourced)
- Better packaging (e.g. more convenient size, easier to use, aesthetically pleasing, sustainable)
- Better delivery (e.g. stronger formula, better taste)
- Better perception (e.g. more luxurious appeal, glass vs plastic)
How does premiumisation impact revenue?
- It gives you a positive margin conversation to have with your retailers
- It helps keep your category a priority for the retailer as opposed to going down an everyday commoditised route
- It enhances your average revenue per case
- It enhances your product mix and your profit margins
- It helps to replace lost volumes on tired, out of favour products
- It can give consumers reason to re-evaluate your brands
- It can help you drive penetration into new consumer segments where you are currently underrepresented
A typical push-back from manufacturers is that premium products only make up a small part of the category, are receiving too much marketing focus and the core is suffering. In reality, to embed a new product in the minds and baskets of consumers, there will always need to be a large initial marketing focus, and like all new product development (NPD) success isn’t guaranteed. Ultimately, consumers may not think the premium price is justified, but when you do get it right it can be a real game changer for your category, revenue and margins.
“What about us? There’s not much we can do to premiumise in our category…”
When speaking to our clients about mix, we often hear that: “our category is an ‘everyday’ category, sure it might work for other more glamourous categories, but not for us”. There is a belief that premium opportunities are minimal, that their focus needs to be on cost reduction to improve profitability. This is a poor argument that points to a weak culture of innovation. There are many great examples of seemingly everyday categories that have managed to introduce a premium product to deliver a better mix. When you look at the difference these premium products can make to your mix it puts into sharp focus the relatively small amount of money that is typically invested in innovation by some consumer products companies.
Take baby wipes as an example; currently on Amazon in the UK, Pampers baby wipes are priced at £0.02 per count, and Johnson & Johnson’s premium Aveeno brand wipes work out at £1.63 per count, that’s a huge premium. Whilst there will be differences in the cost of goods of each product and the marketing behind them, fundamentally they serve the same purpose. Johnson & Johnson have managed to provide consumers with a premium offering enhancing the revenue in the category and their own revenue mix. Aqua Wipes, a competitor to Johnson & Johnson within the same category are even higher priced at £21.74 per count – that’s a massive premium, and all because they are ‘100% Biodegradable, Plastic Free Wipes, 99.6% Purified Water, Newborn Wipes, Vegan, Paraben Free, Perfume Free, & NHS Approved’.
This is just one simple example – and if it’s possible to premiumise here, it’s possible anywhere.
Give it a lot more focus
Have you ever looked at the amount of time and money you spend, as an organisation, encouraging your consumers to buy your products on promotion – at a lower price?! Surely you can find some of that time to work out how to steer them towards a higher price or a more profitable mix?
If you are not getting premiumised products coming through from your marketing teams then you need to work with them to generate options. As the baby wipes example above shows; it can be done in any category, it just requires innovative thinking. Start by seeing what other categories and brands are doing. Even stepping back and looking to other industries for inspiration can be a great way to generate ideas. Also look to the past, there are numerous examples of failed launches into premium that you can explore, maybe it wasn’t relevant then but it will work now? Maybe there were problems with the product or the marketing around it. Just because it didn’t work once doesn’t mean it will never work again.
The message is clear, premiumisation is a great way to positively impact your revenue and profit margins, it’s not easy (few things are in revenue management) and it won’t always work, but it’s critical for the health of your business to innovate and take risks.
Find out more
Acumen are a revenue management consultancy, helping consumer products companies make smarter, more profitable decisions through a combination of pricing, promotions, and mix management. Speak to one of our consultants here to find out how we can help your business make more profitable decisions.
