Un-Earned Premium Status?
It seems that almost every company I meet believes that they have a premium product or service and I rarely meet companies willing to concede they are anything but premium. What if a self-described Premium company was actually not premium, how could they know?
A number of years ago, I made a mind experiment. Imagine I have a company that makes bookshelves that are not substantially different than Ikea bookshelves. Of course would be some some minor differences, but let’s assume they are not relevant. However, my pricing would be 10x or more than Ikea. What would that company look like?
- Would I have customers? Yes. But no huge numbers.
- Would my customers appreciate my company? Yes, they paid a lot and provided I did some extra service, most will believe they received a premium service. (ie. people believe an expensive diamond looks better than a cheap diamond)
- How would I describe my customers?
- Cannot put up with the limitations of a non-premium supplier
- Is “smart enough” to recognize the importance of the “premium differences” that I claim are so important. ie. Wants to be educated vs knows what they want.
- How would I get customers?
- Channel: Word of mouth/referral would be the main source. The sales process would require experts to educate the customer and provide superior service. I might think my salespeople were part of my value.
- Other forms of scalable inbound or outbound would be difficult to message without a strong differentiator that is actually in demand.
- I would need situations where there was no competition
- Growth?
- Premium is especially attractive in a new, growthy, or chaotic market. ie. no one wants “discount NFTs”.
- Because of the channel, growth would later be limited and expensive. However, since gross margin is so high, it would be tempting to try to increase profits by using expensive growth to dilute high overhead costs over a larger amount of revenue.
- What would by price sensitivity of customers?
- Increasing prices or lowering prices would have near zero impact on the customer conversion rate, thus my price would keep increasing.
- It would be very difficult to compete in the non-premium sector (eg. a similar product in a 2-tier strategy) and grow there since the price difference would be so large and the cost structure in the company so hard to shrink.
- Could I control costs? No. At this price, customer expectations would be high. As the price increases, they become even higher. Eg. product would need to be in stock immediately and be available for delivery when the customer requests rather than when cost optimized delivery company is available. Overhead costs would consume all the margin. Additionally, I would feel the pressure to live up to the price on the product side and add even more features (costs) that customers likely do not really care about unless you “educate” them.
In the end, I would have a high cost of sales & delivery, high price, with modest growth. A ‘lifestyle company’ with modest net earning. I would have no indications that my product was not really earning its premium position.
My conclusion? Premium businesses are sexy and fun, but self-delusion is an underestimated risk. When that happens, you risk driving your business into a dead end