Premium Pricing Strategy Case Study


In the previous post we discussed how you can charge premium price without losing sales and still have customers love your products. No one does this as well as Apple, the most valuable company in the world by market value. Apple never competes on equal playing field with their competitors. They write their own rules and come up with innovative products that no one has dreamed off year after year. Their slogan explains how they have been able do this – Think Different! As a result Apple has been able to charge premium price for all its products and enjoy remarkable sales growth and margin for a long time.
What is their secret sauce? In this post we attempt to decipher their strategy by understanding how they apply the rules of premium pricing we described in the earlier post.

  • Differentiation – You can recognize Apple computer in the middle of hundred others from a mile away. With their distinctive aluminum casing and signature logo Apple computers are in class of their own. There is no apple-to-apple comparison between them and those from competitors. When all other computer makers are fighting for sales with low price Apple holds its ground and commands premium. And still when you ask any college bound kid what computer he wants without a doubt the answer will be Apple. No wonder Apple enjoys double-digit margin on their products when other PC makers are happy to achieve even 5%.
  • Quality – All Apple products are known for their workmanship and quality. They last for a long time, although most people do not want to hold onto them for too long because they are always itching to get their hands on the next interesting thing. When you do run into problems with Apple products their customer service takes care of them quickly. Anyone who has visited their “Genius Bar” in Apple Store understands this.
  • Must-have Products – Show me someone who doesn’t desire Apple products and I will show you someone who has been living in a different planet for the last 10 years. Apple products are objects of desire for 3-year old kid as well as 90-year Grandmas and everyone in between. According to CNBC All-American Economic survey half of U.S. households own at least one Apple product, while 9% own more than 5 products! Any company would die for this type of customer lust for their products.
  • Guarantee – When most PC users are afraid of their computers getting infected by virus and losing data, Apple products have been relatively virus free. With their iTunes program they control which applications are allowed to get into Apple products. This gives users peace of mind that the applications downloaded on their computers, iPhones or iPads will be safe to use.
  • Show and Tell – Steve Jobs was a master of introducing new products. It is said that he could pick up a stone from the sidewalk and sell you for the hundred dollars! Months before they introduce new products rumor mills swirl with excitement and journalists flock to their grandiose product introduction to see what Steve Jobs has to show.
  • Hold Ground – Even in the face dire financial situation in 90’s Apple never compromised on quality and price. They always maintained that their products are superior to anything else in the market and hence command premium price. It finally paid off when it became the most valuable company in the world few months ago.

Do you agree with our analysis? What more would you add from your own experience with Apple products?

Managing a brand in multiple price tiers requires careful portfolio positioning. These two case examples are brands that have clear market strategies for different price tiers. Gevalia challenged Starbucks by taking its direct-to-consumer super premium brand into the premium supermarket retail segment.  McCormick successfully offers both mainstream and premium products, essentially on the same shelf.

Gevalia Builds its “Super Premium” Brand in the US with a Premium DTC Heritage

For more than twenty years, Gevalia coffee was marketed in the US as a super premium DTC (direct-to-consumer) coffee, available through mail order.  The brand was known for its Swedish heritage (as the ‘coffee of kings’), for offering a free coffee maker, and vacuum-sealed “brick” packaging. As of 2011, Gevalia was a nearly $400 million worldwide-brand for Kraft. Its US market position was a niche, super premium business.

The Challenges of Leveraging the Gevalia Brand to Premium at Retail

In 2011, Kraft started marketing Gevalia as a direct competitor to Starbucks in the premium supermarket retail coffee market. Kraft offered the Maxwell House brand in the mainstream price tier, but the company had a portfolio gap in the premium price tier (after coming to the end of the Starbucks distribution agreement). The Gevalia brand was selected to fill the gap, and launch in retail as “Approachable Premium,” priced at $1.00 below Starbucks.

With considerable work and investment, the brand’s product and packaging were completely redone for the supermarket retail channel, and the positioning used was “Rich, Never Bitter,” positioned against the perceived bitter taste of Starbucks.  Not surprisingly, Starbucks responded aggressively to this directly competitive launch by lowering its price and managed to take several large retail accounts away from Gevalia.  Kraft/Gevalia management determined to stay the course to maintain its price position, doing “what it takes.”

As of 2015, the brand enjoyed $235 million in US retail sales. While this represented a 32% increase from 2013’s sales, sales fell from 2014-5. In this highly challenging market, Kraft was able to migrate its brand across channels to fill a portfolio gap and build a competitive business.

How McCormick Successfully Leverages Its Brand Portfolio for Both Mainstream and Premium Markets

A second tiered-pricing example is McCormick.  McCormick successfully competes in both mainstream and premium price points, without undue cannibalization. The company has carefully thought through its consumer targeting and need state strategy, as well as the product and packaging distinctiveness required to offer these two successful lines.

The core, mainstream McCormick brand targets Engaged, Confident Cooks and Committed Cooks for more everyday occasions.  Its products are offered in a plastic container with a paper label.

The McCormick Gourmet sub-brand targets Upscale Engaged, Confident Cooks who put pride in cooking, buy gourmet and value high-quality ingredients. While they use these high-quality ingredients generally, the Make It Impressive occasion/need state is a key focus. The Gourmet line leverages McCormick’s global expertise in crop and regional differences to yield higher-quality spices. The Gourmet line is sold in a distinct, glass octagonal container with a clear film label for a contemporary, no-label look. Additionally, the Gourmet sub-brand was relaunched in 2015 with new varieties and packaging that offers flavor seal technology.

The results are impressive: both the mainstream and premium product are growing.  Mainstream McCormick has 2016 sales of more than $600 million in the US, grew approximately 2.5% in dollars vs. prior year, and is sold at $3.48 on average per unit. The Gourmet sub-brand has sales of over $100 million in 2016,  grew 3.3% vs. prior year and is sold at $5.25/unit.

These two case examples show how brands have addressed the challenges of multi-tier pricing, and the challenges in achieving results. Success comes from developing solid portfolio strategies and consistently applying them, while making tweaks based on market realities.

 

Filed under: Branding and Naming, Business Strategy, Consumer Insights, Food and Nutrition Strategy, Market Strategy, Marketing Strategy Case Study, Product Development and Innovation

Tags: Food & Nutrition, Gevalia, Kraft, Market Strategy, McCormick, Pricing Strategy

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