More companies are expanding product lines to offer premium goods at higher prices, sparking worries about economic gentrification. But Wharton’s John Zhang explains why “premiumization” is good for consumers and the economy.
A recent article in The New York Times questioned whether the economy is becoming “gentrified” as more companies offer higher-priced versions of whatever they sell, from fancier doughnuts to roomier airplane seats.
Wharton marketing professor John Zhang’s answer is a flat “no.” He says the wealth gap wasn’t created by the market and isn’t a problem for businesses to solve. In fact, he says, premiumization is good for the economy because it ensures there are plenty of products for consumers at every point along the price spectrum.
“To equate gentrification with premiumization is to put the cart before the horse,” Zhang said during an interview with Wharton Business Daily on SiriusXM. “Firms are catering to customer demand; they don’t really create that demand. I think as long as the wealthy want to buy the premium products, the marketplace will find a way to satisfy those demands for the betterment of everybody.”
Premiumization has been around for a long, long time, but the practice has been spreading across more companies lately. No longer the domain of the automobile, alcohol, or travel industries, premiumization is showing up in products as humble as lubricant and doughnuts — WD-40 now has a higher-priced can with a better sprayer, and Krispy Kreme launched a “fourth price tier” line of treats that include a handmade cinnamon roll.
Catering to a Range of Consumer Demand
Zhang said companies are motivated to make upscale versions of their products because price tiers help them reach different segments of consumers, including the wealthy and middle-class earners who socked away cash during the pandemic. Stubbornly high inflation, which fell to 6% in February, is another reason.
“During high inflation, you can imagine that all the firms have incentive to raise their prices. When you raise your prices, you better give good justification as to why the prices are higher. One way to do that is to stretch your product line upward so that you can charge your higher price,” Zhang said. Indeed, with low-cost competitors from Asian countries, companies in U.S. are well advised to go to the higher end in order to differentiate themselves, Zhang added.
Another benefit of premiumization is greater competition, according to the professor. As one company raises the price of an item, other companies will rush in with more low-priced products to fill the void left behind. Through this process, all customers in the market are better served.
Zhang also argues that premiumization can lead to greater sustainability through less manufacturing waste and more deliberate purchase decisions. It also has a trickle-down effect: A luxury car bought at top price may be resold a few years later as a used car, for example. In that scenario, a single product benefits two different consumer segments.
“You also notice that [luxury auto] firms move to the lower end to provide new cars at a lower price. Tesla is definitely doing that,” Zhang said.
The professor, whose research examines targeted pricing strategies, emphasized that firms are in the business of meeting diverse consumer demand. They should not be blamed for driving greater income disparity.
“Premiumization does not directly create haves and have-nots. It allows both sides of the divide to be better served,” Zhang said. “The issue about the haves and have-nots needs to be addressed, but I think only the government has the means to address it properly.”
Tsai Wan-Tsai Professor, Professor of Marketing,
Director, Penn Wharton China Center