What Makes Consumers Willing to Pay a Price Premium for National Brands over Private Labels?

Author: Jan-Benedict E.M. Steenkamp, Harald J. Van Heerde, and Inge Geyskens 

Executive Summary
The growing sales of private labels pose significant challenges for national brands around the world. A major question is whether consumers continue to be willing to pay a price premium for national brands over private labels. This article studies how marketing and manufacturing factors affect the price premium a consumer is willing to pay for a national brand over and above a private label. These effects are mediated by consumer perceptions of quality of national brands in relation to private labels. The model is tested on consumer survey data from 22,623 respondents from 23 countries in Asia, Europe, and the Americas across on average 63 consumer packaged goods categories per country.

Although the results do not bode well for national brands in the sense that willingness to pay decreases as private labels mature, the authors offer several managerial recommendations to buck this trend. The starting point of any turnaround strategy is to embark on a program of significant quality improvement. In addition, strategies that enhance the belief that the production of the product category is difficult improve the perceived quality gap and willingness to pay, regardless of the private label life-cycle stage. In regions in which private labels are more mature, such as North America and Western Europe, the route to success is to go back to manufacturing basics. National brand managers in these regions especially should counter the belief that private labels are produced by national brand manufacturers. In private label development regions, such as Eastern Europe, Latin America, and Asia, there is a stronger role for marketing to enhance the willingness to pay for national brands. Distinctive packaging is the strongest driver of the perceived quality gap and has a strong direct effect on willingness to pay. Unfortunately, copycatting of national brands is rampant. To maintain distinctive packaging, brand manufacturers need to develop a reputation for aggressively pursuing retail copycat violators. Willingness to pay can also be improved by continuous product innovation, advertising, and a reduction of the promotional pressure. For countries in either private label stage, strengthening consumers’ price–quality schema and involvement renders the quality gap much more effective in terms of willingness to pay. Continuous quality improvement is a prerequisite for consumers to maintain their price–quality schema for the category. Advertising messages may reinforce the idea that good quality is worth a higher price. Increasing the personal relevance of the category (involvement) can also make a big difference. Although relevance resides in the consumer, companies can work to create emotional bonds with consumers. Traditional advertising plays an important role in increasing the personal relevance of the category, but new forms of communication, such as buzz marketing, can also be fruitfully employed.

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