HOW TO JUSTIFY PREMIUM FOR THE EMERGING AFFLUENT CHINESE CONSUMERS?

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1 CHINA FOR MORE INFORMATION PLEASE CONTACT: Sirius Wang Director, New Solutions, MillwardBrownACSR Troy Hakansson Associate Account Director, MillwardbrownACSR HOW TO JUSTIFY PREMIUM FOR THE EMERGING AFFLUENT CHINESE CONSUMERS? By any definition or calculation the number of affluent Chinese consumers is growing. The implications of this are many and varied, however one cannot simply apply learnings from other developing economies and expect to succeed in China. The scale and unique nature of the rising affluent class in China makes it vital that marketers understand the mindset of wealthy Chinese and engage with them accordingly. In this article the consumer group defined as high income does not refer to the super-rich moguls often featured in Forbes and the Hurun Rich Lists, but is instead refer to the emerging affluent consumers whose income level rank within the top one third nationwide in China from BrandZ, the biggest brand equity database in the world. BrandZ research has been established in China since 1998 and covers nearly 30 categories, with interviews among 40,000 targeted Chinese consumers every year. This article breaks down BrandZ respondents into three distinct income groups - high income, middle income and low income, to analyze and compare their attitudes towards brands. BrandZ includes consumers from 17 Chinese cities at the first, second and third tiers. The division in terms of income not only avoids the ambiguous definitions of middle class and rich class, but also reflects the income characteristics of mainstream consumers whilst taking into account income disparities across different cities. For instance, the high income group refers to individuals who earn RMB 8,000 or more per month in the capital Beijing and individuals who earn RMB 6,000 or more per month in second tier Jinan city.

2 BRAND MINDSET OF THE HIGH INCOME CONSUMERS IN CHINA Increasing growth in income and wealth means that more and more mainstream Chinese consumers are willing to pay a premium for brands. This is a very noticeable trend, especially among the affluent class of Chinese consumers who are willing to pay more for well differentiated brands, and thus demonstrate an appreciation for well branded offerings. This trend is not only reflected in the first-tier Chinese cities, but also in less economically developed lower tiers cities. High income Chinese consumers will generally pay more attention to the brand when making a purchase, and are increasingly more likely to have prior knowledge and awareness of these brands. This is largely due to the growing proliferation of media and marketing information about brands that is very specifically targeted towards these affluent consumers. However, the challenge remains building longer-term brand loyalty with high income consumers, as this group are less influenced by price, and will often choose among a set of suitable brands when making purchase decisions. The relationship pyramids of consumers and brands clearly demonstrate that these three income groups do not differ on the brand bonding metric (How loyal consumers are to brands), but we do observe notably higher scores on the brand presence metric (How much consumers are aware of brands) in the high income group than the other two lower income groups. This suggests that the high income group have a broader set of brands on their radar, and implies that these consumers are less inclined to establish a loyal relationship with brands, indicating that the key to their purchase decisions is choosing a brand most suited to their needs. Figure 1: Importance of Choosing Right Brands Importance of choosing the right brand % Data source: BrandZ China data Low income Middle income High income There is a clear case for premium brands to build meaningful brand differentiation into their brand DNA, and furthermore to make that differentiation appealing and meaningful to the high income consumer segment. Michael J. Silverstein and Neil Fiske introduced and elaborated the concept of luxury for the masses in their article published on Harvard Business review (April, 2003) by identifying US consumers increasing willingness to pay premium, with brands taking advantage of this trend to succeed in the US market back in The concept of Luxury for the masses is different from traditional luxury, but mass brands can still establish their luxury credentials through demonstrating uniqueness and niche appeal as a justification for their a premium price tag - which is generally still palatable for mass consumers, especially if the high income group are seeking a differentiated brand. An Apple mobile phone is a good recent example of luxury for the masses, as the device is popular with mass consumers in spite of its relatively high price, while Vertu, a very high end luxury mobile phone brand, in contrast, is at the extreme end of the price spectrum making it remote and inaccessible to mass consumers. In this article, we consider those brands who have successfully managed to find and articulate their own foundations to establish a brand premium. We call these cases justified premium brands as they successfully meet the criteria outlined above. We start by examining whether brands can provide unique functional and emotional values to meet more than just the basic functional demands of consumers to effectively balance high premium and high attractiveness. As categories mature in China, building Justified premium brands has undoubtedly become a goal for a lot of brands wishing to capitalize on the growth of disposable income among Chinese consumers.

3 Expensive Brand Justified premium brand Value brand CHARACTERISTICS OF JUSTIFIED PREMIUM BRANDS Cheap Brand WPP and Millward Brown have devised a simple framework called Value-D based on the research and analysis of thousands of brands in the BrandZ database. The Value-D tool helps to map consumer brand price perception against brand attractiveness in order to better understand the characteristics of justified premium brands. The Value-D approach combines these two dimensions, to divide brands into four types, namely value brand (whose price is lower than its attractiveness), justified premium brand (whose high price is balanced with its high attractiveness), expensive brand (whose price is higher than its attractiveness) and cheap brand (whose price and attractiveness are both very low). It is apparent that the expensive brand segment with its insistence on pursuing a premium strategy has to defy the challenge of high price and low demand, which can result in the uncomfortable situation of having a high price tag, but ultimately no market. Many brands of this kind do not score highly enough on brand attractiveness to adequately support the high price that they command, compared to justified premium brands. Justified premium brands and expensive brands also have a noticeable difference in terms of brand equity. We can see from the relationship pyramids that 14% of consumers are loyal to justified premium brands, whereas only 3% are loyal to expensive brands. It is also interesting to note that only a small number of brands ultimately achieve justified premium brand status, according to the definitions outlined above. For instance, only 7% of the nearly 600 brands from the 2011 and 2012 BrandZ Chinese database could be called justified premium brands, more than two thirds of which are foreign brands. Analysis of the driving factors of brand loyalty for justified premium brands identifies dynamism and salience as important factors in driving consumers to establish a close relationship with these types of brands, with the former Figure 2: The Chinese Justified Premium Brand Ranking from 2011 to 2012 (The Top 15) Ranking 1 Wanchai Ferry 31 2 China Telecom 30 3 Olay 22 4 China Southern Airlines 21 5 Head & Shoulders 21 6 Apple 21 7 Darlie 18 8 Changyu 16 9 Sharp Ariel Air China International Blue Moon L'Oréal Samsung Septwolves 12 Source: BrandZ Database Brand Consumer Bonding reflecting the ability of brands to innovate and lead the trend, and the latter owing to an effective media communications strategy. By analyzing brands with high premium credentials and high attractiveness further, we find that these types of brands are influential in their innovation and media communication, The typical justified premium brands are characterized as being creative, in control and assertive in addition to trustworthy, while expensive brands which do not maintain a very good balance tend to be perceived as more arrogant.

4 TIPS FOR BUILDING A JUSTIFIED PREMIUM BRAND The key to building a justified premium brand is to achieve the right balance between a suitably premium pricing strategy and a high degree of attractiveness. Figure 3: Avon in China To achieve this balance the brand should grasp relevant market opportunities and position itself accurately, avoiding a positioning that is too extreme while maintaining uniqueness. Avon cosmetics is a typical case of an unbalanced brand. In 2009 Avon was considered a justified premium brand with its brand attractiveness index as high as 106 in the Chinese market, but this index dropped to 100 in 2012 as the brand did not have enough understanding of changes in consumer demand and underestimated the fierce competition within the category. Meanwhile, its price point remained fixed without any noticeable changes. Therefore, as a result of these market dynamics Avon has now been reclassified as an expensive brand in the most recent assessment, owing to an imbalance between its pricing and attractiveness. Figure 4: Apple in China market Data source: BrandZ China data Achieving balance is only the first step for brands to enhance their attractiveness on the journey towards obtaining premium credentials. Brand attractiveness can also be reflected in a number of other characteristics, most notable and impactful of these is to provide a truly differentiated brand experience that meets or even exceeds the basic functional expectations of consumers. Apple is a very good example with its rapid brand growth in China. Back in 2009 Apple was still regarded as a typically expensive brand and only affordable to a minority, but its attractiveness among mass consumers has grown rapidly in spite of its increasing price and it now retails at a slightly higher price than During this time, it has offered incremental improvements of its unique product technologies, functional characteristics and user experience. This is a good example of balancing brand attractiveness and price to deliver a justified premium brand.

5 POINT OF VIEW Naturally, effective branding communications and promotions, such as celebrity endorsement activities in which brands create premium associations are also extremely important for shaping justified premium brands. Septwolves, a Chinese men s apparel brand has proven the power of celebrity endorsement in building a justified premium brand through its recent advertising campaign starring prominent Chinese male celebrities such as Honglei Sun, Chen Li and Hanyu Zhang among others. The power of the brand endorsement is not confined to the products alone, but also has an additional impact in projecting the male stars lifestyle onto the brand. The imagery of these male characters and male characters lifestyle directly appeals to people with the aspirations to live the type of stylish life as characterized by the brand. This imagery is achieved by maintaining consistent market communications, with the help of broad media channels (including exposure through fashion shows and award ceremonies), thus winning deeper emotional recognition from consumers. In order to become a justified premium brand, it is also necessary to enhance brand differentiation across various media channels and communications to maintain brand dynamism and improve salience of the key brand benefits by consumers. Another example of a Chinese justified premium brand is Blue Moon; a local laundry care brand that has demonstrated how brand dynamism and strong salience can be successfully combined. Blue Moon accounted for as high as 30% of ad input in its category in 2011 alone, the brand targets consumers doing hand laundry and advocates a green low-carbon life by consistently promoting an environmental protection message of liquid laundry detergent and low-carbon life. The unique laundry and lifestyle concept is also endorsed by well-known TV host Lan Yang, thereby keeping the brand meaningful, salient and well differentiated.

6 2 SUMMARY: 1The high income consumer group in China tends to pay more attention to the brand when making a purchase, and their needs are getting ever more sophisticated. They increasingly have prior brand knowledge, awareness and appreciation to enable them to make a suitable brand choice. Justified premium brands can establish their luxury credentials through demonstrating uniqueness and niche appeal as justification for their higher price point, the price premium is generally still palatable for mass consumers, especially the high income group who may be actively seeking a brand that is well differentiated. 3It is critical for justified premium brands to achieve the right balance between a suitably premium pricing strategy and a high degree of attractiveness. In order to achieve this balance the brand should utilize effective brand communications, enhance brand differentiation across various media channels and in communications to maintain brand dynamism and salience of the key brand benefits by consumers. In China, celebrity endorsements have also proven an effective way to build premium brand associations. About BrandZ The BrandZ brand equity study has been conducted annually by Millward Brown for WPP since The BrandZ study has collected information on more than 10,000 brands across 31 countries, including both developed and emerging markets. Over 200 separate product categories have been studied. More than 1 million consumers and business customers have been included in the study. It is the world s largest database of consumer research on brand equity.

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