I can’t resist new words. What is “premiumization”?
Is the Entire Economy Gentrifying?
Companies are trying to maintain fat profits as the economy changes, making “premiumization” their new favorite buzzword.
By Jason Karaian and Jeanna Smialek, The New York Times, March 4, 2023
Big companies are prodding their customers toward fancier, and often pricier, versions of everything from Krispy Kreme doughnuts to cans of WD-40.
It’s evidence of the corporate world’s new favorite buzzword: “premiumization.”
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The premiumization trend also reflects a divide in the American economy. The top 40 percent of earners are sitting on more than a trillion dollars in extra savings amassed during the early part of the pandemic. Lower-income households, on the other hand, have been burning through their savings, partly as they contend with the higher costs of the food, rent and other necessities that make up a bigger chunk of their spending…
The shift toward premium products could signal the start of a more lasting change, as businesses settle into a routine of selling lower volumes for higher prices in a divided economy — a strategy that could leave poorer consumers worse off…
The expectation is that carmakers will continue to focus on bigger-ticket models, while resisting pushing overall vehicle production higher to levels that could lead to discounting even as supply bottlenecks ease…[end quote]
Every marketer knows the concept of price elasticity.
The company’s objective is to maximize profit. Simplistically, a company can sell a large volume of low-margin products, trying to maintain market share by undercutting competitors’ prices. Alternatively, the company can sell a small volume of high-margin products, increasing market share by differentiating its product package by higher quality. That is “premiumization.”
A manufacturing plant with a high fixed cost but low variable cost should be run as close to maximum capacity as possible. But not to the point where oversupply forces price cuts.
If demand is higher than supply in a situation where providing more supply would be very expensive the price should be raised until supply and demand are balanced. Only if the demand is predicted to be stable for the long term should new manufacturing capacity (a large fixed cost increase) be built.
This model applies in tourist destinations that have too many visiting cruise ships. The docking fee should be raised until the demand falls to meet capacity.
This can be a tricky balance, as Disney World discovered when they raised prices and then had to backtrack.
A widespread emphasis on premiumization (higher prices for smaller runs of premium products, lower production of low-margin products) could mean for the economy: Lower production, potentially higher inflation in the short run and permanently higher prices in the long run.
Wendy
