In this blog post, I provide a framework that helps you understand what you can do to become or continue to be a premium company.
What is a Premium Company
To get straight to the point, here’s my definition:
A premium company is a company that can consistently convince its customers to pay more than what they had initially intended for a certain product or service by virtue of its value proposition.
Let’s now dissect this definition and provide more context.
Product vs. Company
The first essential element to clarify is the difference between company, business, and product.
- A company or firm is the organizational structure, in legal terms no not, that operates one or more businesses.
- A business is the exchange of goods produced or services provided for money.
- A product is one of the outputs of a business.
Avoiding product- or pricing-specific answers is essential when trying to answer what makes a premium company. They are not mutually exclusive. A premium company can offer non-premium products, and a non-premium company can offer premium products. However, what makes a premium company is its ability to deliver premium products to the market consistently.
The second important element to clarify is that “premium” is not an absolute or fixed position in the market but relative to the target customer needs. We can draw upon Clayton Christensen’s disruptive innovation framework to clarify this idea.
The framework defines a market or arena with multiple customer types: high-end, mid-end, and low-end. To avoid confusing these terms by their commonly used association with pricing, let’s call these high-needs, medium-needs, and low-needs customers instead.
High-needs customers require the product to offer various attributes and features. In addition, the features must be up to standard. To put it in terms I used in an earlier blog post titled “Attributes and Values: Business Strategy Core,” high-needs customers have many attributes that need satisfying and more than a few that need championing.
Low-needs customers require the product to meet their basic needs sufficiently and nothing more. They are willing to accept sub-standard attributes or forego them entirely.
Medium-needs customers fall in between high-needs and low-needs customers.
Collectively, we define the needs of a customer type as the required product performance.
Firms can now develop and market products catering to different customer types. Generally, the goal for the firm is to understand the customer performance expectations appropriately, then deliver a product that closely matches those expectations. We can call upon the price/value framework from an earlier blog post titled “Value and Price Dynamic” to understand the tension between Value Offered, Value Perceived, and Purchase Price.
This framework offers three possible customer segments in a market with high-, medium-, and low-needs customers. However, in relative positioning, the firm also has the option to make a deliberate choice to either exceed the customer expectations or fall short of the customer expectation. Let’s call this premium and discount positioning.
In premium positioning, the firm delivers a product that offers more or better attributes than the customer needs or expects. It also comes with a slightly higher price tag. The company must communicate to the customer the extra value offered and why it’s worth the additional money. Customers may be willing to spend more than planned if they appreciate the additional value offered.
In discount positioning, the firm delivers a product that offers fewer or worse attributes than the customer needs or expects. It also comes with a slightly lower price tag. The company must communicate to the customer why the lack of value offered is not a concern. Customers who appreciate this story will happily pay less for the product.
The Premium Company
Let’s return to the definition of a premium company. A company is a premium company when it can consistently market premium products relative to its target customer needs and consistently convince customers to pay more for those products.
Notice how I emphasize the word “consistently?” One premium product doesn’t make a premium business. And one premium business doesn’t make a premium company. The challenge of becoming and staying a premium company is that you need to consistently outperform your customer expectations, even when those expectations increase year after year.
Another critical challenge of being a premium company is thoroughly understanding your customer’s needs and wants. Based on that information, you must plan to exceed those needs and wants. And if that’s not enough, you must also be able to execute this plan. It’s tough being a premium company!
The benefit of being a premium company is that over time customers will associate premium with your brand and products and thus will automatically expect to pay a higher price than for an equivalent product of another brand.
Premium Company Margins and ROI
As a final note, I want to cover the topic of profit margins of premium companies briefly.
Following the framework of the premium company, we can say these companies can charge higher average selling prices (ASPs) and higher margins. Thus, the premium companies enjoy higher ROE and can invest in new projects more easily.
However, we must separate the premium positioning from a firm’s ability to capture the value. Whereas premium positioning allows a firm to charge higher ASPs, the margin and associate ROE highly depend on the operating model. Inefficient premium companies won’t be able to capture the appropriate margin and may not achieve the expected return on investment as a premium company.