Observation 2: Premiumization
Innovative brands, seen as different, command a premium
Rising consumer confidence unleashes spending
Innovation leads to Difference, one of the three components of Brand Power, the BrandZ™ measurement of brand equity. Consumers are more likely to pay a premium price for brands they view as Different. The other two Brand Power components are Meaningful (meeting consumer needs in relevant ways), and Salience (coming easily to mind).
In 2014, Meaningful was the most significant driver of Premium, contributing 50 percent toward the consumer inclination to pay a premium, relative to Difference and Salience, which together contributed 50 percent. Meaningful is still important, but Chinese consumers have moved on. Today, Difference has grown to almost 50 percent and Meaningful has declined.
The central reason for this change in attitude is that Chinese consumers enjoy greater choice and expect brands that meet their needs. More Chinese are wealthier and optimistic about the future. Over the past 10 years, the Consumer Confidence Index hovered just above 100 on an index where 100 is average. But, over the past two years, because of strong economic growth and low unemployment, the Consumer Confidence Index rose sharply, reaching around 125.
Consequently, Chinese consumers are less price-sensitive in categories where they have a lot of purchasing experience, such as insurance, technology, cars, hotels, healthcare, retail, and apparel. Consumers are also willing to enter new categories, such as luxury and real estate, where they exhibit price sensitivity when they encounter premium prices
Brand ownership is no longer a factor for consumers paying premium prices. In 2014, State Owned Enterprises (SOEs) and multinationals (MNCs) were more likely to command a premium. Today, SOEs, market-driven brands, and MNCs score 104, 103 and 100 respectively in the BrandZ™ Premium Index, a BrandZ™ metric of a brand’s ability to command a Premium. (100 is average) And today, market-driven brands have the momentum.
The greater openness of Chinese consumers to pay more does not guarantee that they will. Chinese consumers are not only more optimistic, they are more sophisticated. They respond to brands that earn their attention, meeting their needs in relevant ways with products and services that are innovative and Different. To command a Premium, brands need to match these favorable market conditions with decisive actions, which requires offering distinctive products and communicating the Difference clearly. The opportunity to earn a Premium is available to all brands, across categories and regardless of whether they are SOEs, market-driven, or MNCs.