Justifying premium pricing in the cost-of-living crisis

It’s a tough time for premium products. A recent Research Live article warned of a coming pricing storm, driven by global economic and political instability. The headwinds will hit products at the top end of the market first. In this climate, brands need to understand how to justify and defend their higher price point to avoid being sucked into a downward spiral of discounting that can damage brand equity.

When times are tough, consumers use a variety of strategies to cope. If you are accustomed to buying locally-sourced, organic cheese with sourdough crispbreads to go with your artisanal, small-distillery gin and tonic, what do you do to save money? Do you swap for a cheaper brand’s cheese or crackers with mid-market gin?  Supermarket own labels? Choose a craft beer instead of gin? Or do you – heaven forfend – go without your after-work drink and nibbles entirely?

A study by Pricer found that 92% of UK shoppers say they are now price conscious; this is up 33 percentage points since 2021. It also shows that 68% of consumers have switched from branded goods to supermarket own label and 61% have switched some of their shop to discounters.

The risk of discounting
There is a temptation to lower prices to retain market share while the crisis bites. But this can end up in a race to the bottom, with your brand getting stuck in an endless cycle of discounting and promotions, which will ultimately damage the brand and make it impossible to re-position as ‘worth paying more for’ again when the economy improves.

Price promotion seems to work initially – if you measure success purely on the basis of unit sales. But, because all you are doing is pulling forward sales to existing customers who are buying sooner or in bulk during the promotion, you create a later demand problem which, because price promotion seemed to work, you try to address with further price promotion, and so on, ad infinitum.

Brands need to understand the rules that exist for pricing in their specific category and then leverage these rules to differentiate from competitors and to communicate those points of difference effectively to consumers.

There are five steps to do so:

1 ) Determine your actual competitor set
Because consumers are changing how they shop, it is important to understand which competitors have entered or left the consideration set for your customers, so you can define the boundaries of the category. It is important to resist the temptation to fixate on manufacturer-centric categories or subcategories as consumers may be thinking differently about trade-offs.

2 ) Consider intrinsic vs extrinsic differentiators:
Intrinsic factors are the tangible features of the product itself, such as the ingredients, manufacturing process or packaging. For example, is your coffee single-origin or is it a blend of unspecified beans? Is the packaging a beautifully designed paper pouch or a plain glass jar?

Extrinsic factors are harder to leverage but can be key to differentiation. These are the intangibles such as brand personality or emotional connections and these will also feature in consumer decision-making.

3 ) Identify hygiene factors
Once you have compiled a list of features that are relevant in your category, the next step is to understand which of these can truly differentiate (points of differentiation) and which are purely ‘table stakes’ (points of parity), without which you aren’t even in the running. For example, if your chocolate is wrapped in plastic, not foil and paper, it isn’t premium.

4 ) Decide on the key differentiator for your product
You are looking for attributes that fit with the overall rules of what makes something premium in your category, that you can achieve in production and that will make it hard for a competitor to replicate without looking like a copycat.

5 )Focus marketing relentlessly around that differentiator
It’s not enough to decide on a differentiator and then go on marketing the product in the same way as before. Everything must be focused on that differentiator if consumers are to see you as worth paying more for. This involves adjusting all messaging to highlight the point of difference and ensuring that your positioning is razor sharp.

Ultimately, a product is only worth what consumers will pay. How they value your brand will depend on what matters to them. Differentiation does not just depend on great consumer research and strategy – it requires great execution and clear brand positioning. If you want to defend your price point, hold your nerve, resist discounting and follow these five steps to stay worth paying more for.

Steven Melford is founder and director at The Forge.