With inflation resisting the Federal Reserve's efforts to control it, and more interest rate hikes on the way, consumers face increasing price presure for things they need and want.
But not all price increases can be blamed on inflation alone.
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Many companies are taking advantage of the situation to work in price increases through a process known as “premiumization.”
Top consumer brands are leveraging the concept to charge consumers more for their products.
In a word, premiumization is when companies steer consumers towards higher-end versions of their standard bearer products. For example, Krispy Kreme offers premium donuts for the holidays and upcharges for the luxury sugary experience. Or, WD-40 may include a so-called “smart straw” to their standard lubricant, and tack on an extra charge for the amenity.
Product premiumization is when a company adds an element, like a new feature or an upgraded experience, to an already existing product or service,” said Penny Hoarder deputy editor Tiffany Wendeln Connors. ‘Consumers have been trained to see “premium” as the “best,” so they’re conditioned to see these premiumization’s as valuable.”
In that sense, premiumization is a consumer brand’s way of giving buyers a reason to pay more for its product. In the bargain, companies get a higher price point and consumers get a pumped-up product experience that their next-door neighbor may not be getting.
The trend mostly caters to wealthier consumers who can afford to spend more on a product they already buy. “Low-income consumers likely won’t be able to afford an upgrade to a product they may already struggle to afford,” Connors said.
Companies also upcharge for consumer convenience, often adding service charges to their product-buying experience.
“Often, the luxury versions of services are unlocked when consumers become “subscribers” of any kind,” said Ibotta senior vice president Jill Rosen Campbell. “For example, Sephora offers same-day free unlimited shipping for a $50 annual fee and Instacart offers discounts on delivery fees with a subscription. As consumers become more reliant on these conveniences, brands will continue to charge for them to cover the costs of these premium services.”
The product premiumization trend is also likely bigger than consumers may think.
Take the U.S. auto market.
According to The New York Times, in 2017, 36 auto models were for sale at less than $25,000. That’s approximately 13% of new vehicle sales. Last year, only 10 new auto models selling for under $25,000 hit the marketplace, comprising 4% of sales for the year.
Consumer Strategizing in a Premiumization World
While from a consumer perspective premiumization is a cut-and-dried issue (you either buy the product or not), consumer finance experts say buyers do have some options to curb premiumization prices.
“With so many tools and technology available now, being intentional about your budget and purchases is becoming easier,” Campbell said. “Do your homework from home - compare prices using a browser extension tool (Ibotta offers one), research alternative products, and look for discounts or cash back on products you intend to buy before you buy.”
“It’s also a good idea to scan your cash back rewards platforms for additional saving opportunities,” Campbell adds.
Shoppers can also compare products to better understand what the product offers versus the features actually needed.
“For instance, if your favorite brand of paper towels has a “premium” and “basic” version, you may not need the features that the premium version offers – you likely only need a simple (perhaps less plush) paper towel for cleaning up spills,” Connors said. “If the brand isn’t a big deal for you, consider buying another brand or a generic version of the same product.”
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What's the long-term outlook on premiumization and consumer brands, and is it here to stay?
“Some of the premiumization trends may be driven by the pandemic and the fact that brands had extraordinary pricing power over the last several years,” said OptiMine chief executive officer Matt Voda. “Brands are looking for ways to continue the run of profitability they've had, and may be reticent to address their costs as the first place to drive margin improvement.”
“There will always be luxury brands and premium-priced products, but it isn't clear that this broader rush to premiumization is going to be sustainable forever,” Voda said.
Others say that as long as companies make an extra buck or two on premiumization, expect the trend to continue.
“Once a brand raises the price of a product, there isn’t a lot of incentive to return to the lower price,” Connors told TheStreet. “Consumers have already proved they’re willing to pay the higher price."
"Similarly, if a brand can offer features that add minimal production costs for them and further increase their profit margins, there’s not much reason to expect them to stop premiumization," Connors added.
