Persuading consumers to pay more for a product by introducing some kind of “premium” element into it has always been a challenging task—but it was one that big, Established Brands had managed with a reasonable amount of success until recent years. For example, Gillette has successfully encouraged consumers to trade up again and again by continually introducing razors with the latest and greatest shaving technology. A decade ago, the Mach 3 razor was Gillette’s Premium offering for men, until the Fusion line was launched in 2006 at a 40% price increase, followed by the Fusion ProGlide in 2010 and the Fusion Proshield Flexball in 2016—to name a few of the brand’s major releases.
For some time, however, established players have been having trouble premiumizing their products. Smaller brands have been picking up the slack. In 2015, for example, small food and beverage manufacturers drove nearly half of category growth, while the top 25 manufacturers could only take credit for 3%. While these numbers indicate an underlying issue with all new product development, there’s more at stake with premium products because of their higher revenue potential.
One response by established brands has been to acquire smaller companies. A few of many examples include PepsiCo’s 2006 acquisition of Izze, an all-natural, no-preservatives-added fruit soda; Unilever’s 2009 acquisition of salon haircare brand Bed Head; and Kashi’s acquisition of snack brand Pure Organic earlier this year. However, this strategy can be costly and difficult to scale, as winners do not come cheap. With small companies popping up all the time and gaining momentum rapidly, purchasing every company that poses a serious threat may not be feasible over time.
Clearly, it would be preferable for established companies to introduce premium products of their own. Rather than starting with their own portfolio needs and barreling ahead—a supply-driven strategy that companies rarely seem to escape—successful companies start with the consumer’s mindset and use that lens to identify market gaps. Ripe areas for premium innovation tend to be categories where the premium segment is healthy, but where there is a large price gap between mainstream offerings and the existing premium tier—that is, where the existing premium tier is effectively a super-premium offering. While there are other routes to breakthrough premium products, the one we’ve seen be successful over and over for established companies is this one.
For example, Breyers, the ice cream brand, recognized that the gelato market was booming, but that super-premium gelatos were selling for 2.5 times the cost of mainstream ice creams. They pursued the opportunity represented by the size of that spread with Breyers Gelato Indulgences, charging 70% more than the cost of mainstream ice creams—an appreciable increase, but still a much lower price point than its super-premium gelato competitors were charging. The initiative generated $62 million in its first year with 30% growth in year two.
Similarly, Sally Hansen, the maker of nail care and other beauty products, introduced Miracle Gel nail polish at a price point that was much higher than regular nail polish—but much cheaper than a gel manicure in a salon. By providing the benefits of a gel manicure at home at half the cost of the salon price, they successfully targeted buyers of less-expensive products who wanted a better manicure but felt they could not afford salon prices. This new product line generated $104 million in sales during its first year.
In some cases, there may not be an obvious price gap within a category, but particularly innovative brands have been able to create them. In the case of Sally Hansen, the team looked beyond the traditional category boundaries—deciding that the “super-premium” tier for nail polish was actually the salon experience, not a particularly pricey use-at-home polish. Similarly, Scholl Velvet Smooth Express Pedi, an electronic foot file launched in 2014, is another example of a product that consciously managed consumer’s frame of reference for pricing; the product was compared to a salon pedicure rather than a manual foot file or pumice stone. When the starter kit launched in Germany and France, consumers didn’t balk at the €40 price tag. The product exceeded €10 million in first-year sales.
Dole’s Chopped Salad Kits also succeeded using this principle. The Dole’s team worked to understand the allure of a restaurant-quality chopped salad—including taste, texture and even the way that the planning, shopping, preparation, eating and cleanup tasks would feature in consumers’ lives. The result was a bagged salad product that, on the plate, tasted as if it had come out of a restaurant kitchen. The line provided enough flavors that the consumer would feel they were choosing from a menu, low calorie counts, healthful ingredients and restaurant-style exoticism. As a result, it generated more than $100 million in sales during its second year.
This “Goldilocks” strategy of positioning premium products such that they’re not too expensive, but not too cheap is uniquely suited to established brands. Since the goal is to combine premium prices with mass market reach, brands that already have mass awareness, distribution and retailer support are miles ahead of smaller upstarts. As a lesser-known brand, simply getting a product on retailer shelves is a long, uphill battle.