What about the premium...?

On these days of uncertainty, economical struggle and limited activity, the luxury industry and the premium segments might seem jeopardized. Where are they heading to and how can they double the bid?

by Jaime Teulón. International Marketing and Business Development Executive and specialist in Premium products and Services

A lot has already been said on what companies will face on the following months, first with the sudden stop on activity, and all the potential complications on the supply chain, and then with the consequent financial crisis that will surely have an impact on the consumer behaviour, on their patterns and expectations.

The first logical idea that will come to our mind is to expect that, in an almost certain situation of loss of purchasing power, consumers will choose to first cut unnecessary goods, and simultaneously opt for cheaper products that cover those necessities.

This is very easily understood thru the Price-Value Elasticity, which is explained by Economical Theory. In very basic terms, it is the relation between the perceived value of the item and the price consumers are willing to pay for it. Normally this is shaped like a slope. This means the more perceived value for the item, the more are consumers willing to pay for it.

In a super basic example, you could pay 1 Euro for a piece of a nice cloth, because you find it beautiful, 25 Euros if that piece of cloth is a piece of garment, and it serves you as clothing, maybe 50 Euros if you think is going to make you look prettier, and up to 250 if you think is going to project on you exclusivity and status.

But , during a recession, and consequence of a change in the willingness to pay, that the slope will flatten. Shortage on budget will impose that some consumers are not willing to pay certain values at former prices.

Following our example, that nice cloth in the same consumer′s mind is now only worth now 80 Cents, he won′t pay more than 20 Euros for that garment, and he will now think how that 40 Euro alternative makes you look prettier as well. That thirst for exclusivity and status will not make you pay more than 200 Euros.

Or if you see it from the opposite perspective, you should justify with additional value in order for the consumer to pay those 250 Euros. Your sale could be threatened by a competitor which is perceived as less valuable, but with a minor price. There is also a risk that after that first purchase, the consumer might adapt his perception and increase the slope of the value of your competitor′s item. This could potentially take you out of the equation. As summarized by the Oracle of Omaha:

“Your premium brand had better be delivering something special, or it′s not going to get the business”

Warren Buffett

Let′s move on, away from the theory and onto reality, with that simple but crucial idea on the importance of value. Especially in these times, it multiplies its importance, in order to sail on the treacherous waters of elasticity.

It is well known that a period like this polarizes wealth, resulting in growing richness for those at the top of the pyramid. A common strategy among brands is to replicate that polarization strategy, splitting products, breeding two alternatives which aim to react to the consequences of the crisis. One of them, obviously following those whose purchasing power has been reduced and have been inevitably tempted by lower positionings, and the other, responding to those who have increased their wealth or haven′t been affected by the financial tsunami, in a move similar to a market skimming thru a range increase. There are other brands that due to their volume or capacity won’t have the possibility to apply that split and will have to work with their current product.

Let′s focus at that scenario for the jeopardized segment, the ones who receive that financial crisis and therefore modify their purchasing habits, as this should be the dynamic segment that determines our result in this new paradigm.

First question would be to know how important it is in % share of the market. It’s difficult to estimate today, and only the final of this crisis will clarify how many subjects were affected, based on the importance of the shock. However, we can look at past examples. In a study on the 2008 crisis and its effect on the luxury industry, the IE in Madrid structured the market in 5 different layers, and limited the effect to the 2 with inferior resources, which they called the Aspirational Mass-market (AMM). The AMM had a share of 53% of the market in absolute sales. Obviously, the volume of purchase per household (remarkably minor compared to the top layers) was compensated by the number of households in those layers.

Can we expect that more than 50% of our sales is negatively affected? I′m sure it′s a solid starting point. It also explains why this should be the main focus of your efforts.

Second , would be to fathom in how to maintain as much as possible of that 53% of sales. We all know that it costs 5 times more to attract new customers than to retain current ones. If we don′t follow the pricing reduction temptation, the price-value slope gives you two options: first to increase the value, which can be challenging in mature markets or product life cycles where innovation can’t take you much beyond.

Second is not so mathematical and is related to the consumer attachment. Reinforce the link with your consumers so the emotional factors secures their links to your brands.

I mentioned in previous posts some brand actions on difficult times. This feeling of support and empathy is a 2 – way street, where consumers will maintain their allegiance to those brands with a positive impact on society. Luxury Brands have already donated notorious sums of money to the cause against COVID, some examples are Armani, Dolce&Gabbana, Kering ( Gucci & Bottega Veneta). Prada preferred to contribute with medical equipment. Most of the spirits brands have contributed by producing free hand sanitizer (that had completely vanished from the retail shelves due to overwhelming demand), for instance LVMH and other spirits and beer brands like Brewdog.

For some other brands it′s a matter of reinforcing their brand message and “holding hands” (only figuratively, these days) with their usual customers, through messages of support and understanding in these difficult times. In the spirits industry particular case, this has been materialized with actions of help to the On-premise industry, now on times of imposed closure, and with commitment and support in the forms of bonds and initiatives for whenever these businesses restart their activity.

The last remaining group of brands will be leaning on their uniqueness or differentiation, trusting that their customers might not find competitors up to their standards and soon return to the herd. A risky move, and a potential point of no return.

Let′s not forget that the premium categorization started as a definition structured around price ( a 20% or more above the average standard pricing), however nowadays this premiumness is widely defined around the extra value that justifies the price difference. This extra value can either be material, but in numerous times it will be intangible and related to the consumer perceptions, so volatile, interactive and demanding these days.

In my personal experience in previous crisis (and as my recommendation as well, although a long and exhausting road), instead of a defensive contraction, our management raised that stakes and that marked our strategy. Growing sales teams, groundbreaking campaigns, global initiatives and endless international presence. If your message is understood and in fact unique, and your values are coherent and respected, your market cluster will respect and endorse you.

Now more than ever, it’s the time to work on those values, to communicate and talk to consumers and channels. This ocean odyssey will finish only when there is land in sight. There are some positive news for those who make it through, there is a market filter. Only the skilled and prepared cross to the other shore, ruled by customers and their perceptions, an ambitioned territory by the brands. What is the route? Hidden and challenging , but I would start with the following:

• Think about your positioning and your segments. How sensitive are they to the financial turmoil? Do you mostly depend on the AMM?
• Will this period shake the positioning map in your competitive environment?
• How are the AMM consumer linked to your brands? Are these links still valid?

Keep yourselves safe and sound.

From the bunkers,

Jaime Teulón