Premiumization: How Smart Brands Become Category Leaders
April 2nd, 2021 (Updated 04/06/2021) | 8 min. read
By John Kuffel
How to Premiumize Your Brand and Become a Leader
Things are shaking up for the Consumer Goods industry. COVID has resulted in many categories taking a tumble, thanks to the shift away from restaurants and toward retail, where supplier margins are often considerably smaller. Retailers are now trying to eke out every little bit of profit they can, which is creating long-term threat to suppliers.
To make matters worse, suppliers are not allowed to influence retailer shelf prices in Europe. The antitrust laws set by the European Commission were put in place to protect consumers from over-inflated prices and they make it illegal for suppliers to influence the shelf price of their products at the risk of incurring huge penalties.
While the customer must be protected… the law really puts suppliers in a crunch. When volume is down, not being able to increase prices can mean the difference between being open and closed for business. And not just during a pandemic.
Pricing in Fast-Moving Customer Goods (FMCG) means establishing a recommended retail price, a promotion price, and sometimes a maximum shelf price at the beginning of a contract with a retailer, and that’s that. You might be allowed to make a price change about once a year, but many retailers will want to know when a price change is coming and what it’s going to be – so you have to be many months ahead of yourself. Once a price is set, it’s set for a long time.
In the US, you have much more flexibility with prices, but you’ll likely get a lot of pushback from retailers if you try to increase. If you start raising the price of your candy bar, you put them in a tight spot, because if they raise their prices accordingly, their customers may head over to their competitor. If they don’t, they’re losing their margin to you. What do they do? Well, they might de-list your candy bar. And you’ve lost yourself a retailer.
Suppliers of non-branded products are often told to set prices wherever they want because the retailer will take X% margin regardless. If your product does well, they’ll continue to stock it, but as soon as it stops rotating on the shelf, it’s over.
No matter the product, market or category, having the right price is crucial to ensuring a long and happy relationship with your retailer.
How Tiered Pricing Works For Your Retailer
As a retailer, tiered pricing is a method of segmenting the prices of products based on specific target markets, often breaking categories down into subcategories. It is also known as Good-Better-Best pricing.
So the instant coffee category, for example, may be split into A brands – the market leaders (e.g., Lavazza), B brands – the number twos (e.g.. Illy), and C brands – everything else.
With C brands, retailers often just listen to suppliers and price according to the recommended retail price. Their interest in the product is low and so is the price.
With A brands, the retailer is going to listen to the price you suggest, but will then look closely at what other retailers are doing, work out how successful their promotions are, and calculate its rate of sale.
Then they’ll set their own price (which they are free to play with) and the supplier has no say.
However, categorizing brands into tiers is not just about quality and cost. It’s about perception, too. How trendy is coffee right now? Are customers making a shift to organic? To fair trade? To tea? What are they willing to pay for the allure and street cred of drinking coffee or a particular brand of coffee?
Tiering their pricing helps retailers differentiate their offerings based on perceived quality and exclusivity.
And this is where suppliers can influence the shelf price of their offering.
Premiumization: So Much More Than Just a Price Tag
Premiumization is what suppliers do to make their brand or product more appealing to consumers by emphasizing its superior quality or exceptionality or by bringing a new high–end version of their product to the market.
With FMCG, this is done by premiumizing the category, not necessarily the product. Because once your product is out there you have perhaps one chance to reprice it, if you’re lucky, and then it would only be when the product is still relatively unknown.
So, what you want to do is premiumize the category. This way your product can ride the wave of the category’s success to a trendier spot and a higher price point. It’s how you can move your product up the tiers toward A status.
It does, however, require some reinvention on your part (creating a higher–end product) and/ or a lot of clever rebranding (bottles, labels, marketing…)
How Gin Turned Pink
In Europe, we’re drinking far less alcohol than our parents and grandparents drank, especially wine and beer. We want our choice of alcohol to reflect how special we are. So, we’re moving over to spirits and cocktails.
Fifteen years ago, there was nothing premium in gin. Gordon’s, Beefeater, a quirky little brand called Bombay Sapphire, and a bunch of other stuff you wouldn’t even drink at college. Some was more expensive than others, but nothing was considered luxury – a savant’s gin.
Bombay Sapphire noticed this. So, they created a premium gin. They followed the example of the premiumized vodka category with a better flavor and a stylish fancy bottle. Bombay focused not just on quality and presentation, but on delivering a much better taste profile than the expensive “ginny” gins (like Beefeater and Tanqueray), making it more mixable. They presented their new gin as a premium product, inside out and from top to toe.
Now, as we’ve said, premiumization is not about the product, but the category. So, by offering a high-end gin, Bombay Sapphire put the long-neglected gin category back in the limelight for customers wanting to give off an exclusive, luxury vibe to their hammer dance at the local club.
All gin brands profited from this elevated profile, pushing even C brand prices up. As the only brand in the A category, Bombay Sapphire was laughing.
And that’s premiumizing. You’re cutting down the volume, but increasing the quality and the price per unit. This helps promote the category and draw new customers in.
At the time, some were afraid to introduce Bombay on any large scale because it’s a bottle that cost almost €20, when mainstream gins were on shelf for €9.99. If you would have told somebody then that they’d be drinking gin at €22 a bottle, they’d have laughed you out of the room. But that’s the average price of a bottle in Germany today.
So, gins were cool and super popular. But after a while, they were so popular that they became mainstream again — no longer luxury or exclusive because everyone was drinking them.
Not only did this indicate to Bombay Sapphire that is was time to raise their prices, but that the market was ready for even higher-end gins; €30, €40, even €50 bottles.
It wasn’t until around 2010 that other companies started to get in on the gin act and the market became very quickly flooded with these very expensive “boutique gins”, with variations ranging from infused with botanicals to cocoa flavored!
Then, pink gin landed and that took Europe by storm and most of the category by surprise (invalidating any forecasts they had). It brought many new customers to the category (predominantly young females) with its sweeter flavor and Instagram-worthy appeal.
Its success was unprecedented. There are now over 150 pink gins on the market and they account for 14% of total gins sales with growth expected to continue.
The data hub for the world’s alcoholic beverage market, International Wine & Spirits Record (IWSR), determines that the gin category as a whole will see a volume CAGR of 4.2% globally by 2023.
Ways to Premiumize with Pricing
For many companies in the Food and Beverage industry, pricing data sits wallowing in Excel spreadsheets or burning a hole in someone’s head.
In order to truly premiumize with pricing, you must understand your category inside out.
For this, you need a dedicated pricing solution, like Pricefx, that integrates seamlessly with your current technology stack so all data is in one place. Not only does this give you excellent visibility into your own pricing, but makes accurate analysis of your data possible. It also pulls market and competition data in real–time so that you can quickly respond to changes.
You can define a pricing strategy specifically tailored to your business and dynamically segment retailers based on the market. It’s also easy to manage your annual agreements, promotional rebates and point of sale validation processes.
Your sales team can be confident in their quoting as pricing is backed by data, and approvals are streamlined and automated for a quicker turnaround. Discounts are easy to define and campaigns can scale globally with multi-currency, multi-product and multi-unit support. Accurate real-time pricing simulations help you test the impact of a price change or a promotion.
If you’re looking for a way to boost your premiumization potential, look no further than Pricefx.