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The Power of Low-End Products for Industry Leaders

Low-end products can save an industry’s bacon when the industry falls on hard times. Most low-priced products are what we call Price Leaders (see Audio Tip #83: Price Leader Products and Companies on StrategyStreet.com). These products offer less Function or Convenience than do the industry’s more important Standard Leader products, for common pricing savings of 25% or more. (See Audio Tip #81: Standard Leader Products and Companies on StrategyStreet.com.)

These Price Leader products are helping the domestic beer industry today. In the domestic beer industry, Price Leader products are called “sub-premium brands.” These brands saw sales gains of 8% over the last year. In contrast, the industry Standard Leader products, called “premium” beers, saw sales fall 1.4%. “Sub-premium” beers are keeping the industry moving forward. These “sub-premium” beers cost about 25% less than the premium beers, so they offer drinkers an attractive price alternative when the economy gets tough.

Most of the “sub-premium” beer volumes are products of the big brewing companies, including Anheuser-Busch InBev NV, SABMiller PLC, Molson Coors Brewing Company. (See the Perspective, “When Product Mix Matters” on StrategyStreet.com.) So the industry’s Standard Leader competitors have closed the door on erstwhile Price Leader, private label, suppliers of cheaper brews.

These Price Leader products also have a few cost advantages over the Standard Leader products. Most importantly, the big brewers rely on word-of-mouth and price-based impulse buys to generate sales. They spend very little on advertising these brands. On the other hand, they spend a great deal to advertise the “premium” Standard Leader brands. So, while profits are lower on the Price Leader products, the lower margins are no where in proportion to the lower prices these products seek.

Posted 5/26/09

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