Luxury Brands vs. Premium Brands
Updated from August 25, 2009 version.
The difference between luxury and premium isn’t as obvious as you might think. I believe this criteria has to do with what we at Warren Douglas refer to as “share of wallet” relative to the consumer’s household income, calculated against the product’s “function index.”
To unpack that dense sentence a bit, let’s look at the factors that distinguish luxury items from premium items. It begins with the function index. In other words, what’s the motivation for purchasing the item in the consumer’s mind? For luxury consumers, the status associated with a particular brand outweighs the function of the product itself. It’s more important for the item to make a luxury customer look prestigious than it is for the product to perform well. Premium consumers, on the other hand, seek a quality brand they can rely upon to function well on their behalf. The product is a tool they expect to perform at a relatively high standard.
For example, take Steinway pianos. Their music room grand could cost as much as $80,000. To the wealthy entrepreneur who wants the nicest piano for entertaining and to make a furniture statement, it’s a luxury item. A $40,000 alternative could functionally do the trick, but there’s no status with the lesser alternative. However, to the music teacher who views the piano as a necessary tool, the Steinway is a premium choice.
Now that we understand how a product’s function can determine its status as luxury or premium, let’s take a look at how a product may be perceived based on the consumer’s household income. This is our share of wallet principle.
Share of Wallet
Think of the share of wallet as a scale of financial sacrifice. When the same item represents a different percentage of a household income for different consumers, share of wallet comes into play. How much a consumer is willing to sacrifice to own the item factors into determining whether the item is premium or luxury.
If an up-and-comer college graduate uses a $400 Montblanc fountain pen to sign the contract for his first salaried job, the pen is a luxury item rather than a premium item. If a multi-millionaire uses that same brand and model pen to write his personal checks, the status of the pen becomes relegated to premium. For the job applicant, the pen is a status symbol. For the wealthy businessman, it’s a tool with a lower index relative to his income.
Playing into both of the aforementioned factors is the mindset of the consumer. While the spectrum of consumers is more of a nuanced gradient, consider these three types of shoppers and the different mindsets that define their purchase behavior.
- Bargain shopper: Focused on price, even at the expense of quality.
- Premium consumer: Focused on brands that provide great quality at reasonable prices.
- Luxury consumer: Focused on brands associated with status, regardless of price.
The same individual could be any of the three depending on their mindset at the time. Premium consumers on a car lot may be bargain shoppers in the grocery store. Do consumers view a purchase as practical or frivolous, essential or extra? Is there an ROI perspective to consider as well? It appears that premium consumers may desire a tangible ROI (performance) while luxury consumers desire an intangible ROI (perceived status).
Marketing to Luxury and Premium Consumers
Why does this matter to marketers? It all has to do with understanding the mindset of the consumer in the right context to engage and drive a predictable purchase pattern. For Montblanc, the brand is both premium and luxury, but premium to one audience and luxury to another. The secret ingredient in marketing to both premium and luxury consumers has to do with the function index, and how strong that factor is to influence purchase.
When marketing to luxury consumers, communicate the status associated with a brand.
- Why is the brand worthwhile, regardless of context?
- Who else of note has one?
- Who will it impress?
- How will others perceive the owner?
When marketing to premium consumers, it’s important to appeal to their desire for quality within a specific context.
- What results can they expect?
- Why is the brand worth making financial sacrifices for?
- What is the anticipated ROI?
- How does this tool merit the price?
Nuanced marketing requires nuanced targeting supported by nuanced messaging. Ideally, premium brands will reach both luxury and premium consumers. The topic becomes really fascinating when considering brands in categories that are much more commoditized, such as grocery items, home furnishings, and even pet care. For more information on premium brands, or information on how Warren Douglas can index premium brands in a specific category, contact one of our marketing strategy experts.