Blog

Many executives fear that they are not doing enough to fend off low-cost competitors by targeting budget-conscious customers. For example, reaching out to young consumers as they begin to develop buying habits and settle down provides an important opportunity to gain long-term loyalty. At the same time, however, these executives are equally concerned that down-market strategies could damage their brands. Are cheap offers a door to new customers or an unacceptable risk?

Take a look at the history of the Mercedes-Benz CLA, the company’s entry into the entry-level luxury automobile market. At least in the short term, the project seemed to be a success. The first sales drove Mercedes past BMW as the best-selling US luxury brand, and the CLA was Mercedes’ most successful model in two decades. Even better, around 75% of CLA buyers were new to Mercedes. As CLA buyers get older, Mercedes hopes these customers will remain loyal. But in the long run one can only wonder whether the CLA did more harm than good. For example, the base CLA model has omitted some of the essentials that buyers expect from a luxury car (such as real leather) and scored in a car and driver review. Consumer Reports also noted its slight deviation from a typical Mercedes, with one tester describing it as a “really nice Civic”. When new competitors entered this space – like the Audi A3 – CLA sales quickly slowed down. The entry-level Mercedes now pales in comparison to similar offerings from its luxury competitors and even invites comparison with mainstream manufacturers. Mercedes may pave the way for an up-market shift of brands that have never been mentioned in the same sentence before.

Was the short term boost worth the long term risk? While we leak the Mercedes question, let’s look at some lessons from companies that have successfully shifted the market down.

1. Distancing the new offer from the core brand. Introducing a new line of products under a different brand helps remind people – both internally and externally – to expect something different. By giving the new offering its own identity, you let consumers approach the product with less prejudice. If the offer is no longer surprising, the consumer’s mind has little reference to the core brand. For example, The Art of Shaving, an upscale boutique specializing in grooming products for men, has succeeded in leveraging the P&G assets without boasting of belonging to a company that attracts more mass consumers. Although larger companies often worry that their visibility makes it difficult to keep the affiliations between brands discreet, consumers care less about corporate ownership than you might think. How many people really consider – or even know – that Oakley and Ray-Ban have the same parent company? DiGiorno and tombstone? Do you think more diverse – Ben & Jerry’s and Hellmann’s? Except in rare cases, corporate loyalty is not an issue in the eyes of the consumer.

2. Address a different type of customer. One of the biggest risks with launching a cheap brand is that you might inadvertently create a product that appeals to your regular customers, which ultimately leads to your customers pulling down and spending less money on you over time. One solution is to target and market to a type of customer that you are not currently focusing on. In the early 2000s, Toyota launched Scion to target buyers between the ages of 20 and 30 – buyers 10 to 20 years younger than the company’s US core customer. In contrast to Toyota’s focus on unobtrusive design and mechanical reliability, Scion bragged about customers’ ability to set trends and express individuality. Scion’s marketing was based heavily on grassroots meetings and efforts rather than traditional TV marketing. It was therefore able to attract a group of customers who had no prior interest in Toyota, and it did so without any Toyota and Lexus buyers churning.

3. Clearly embrace different levels of value. It may be necessary to distinguish a sub-brand, but that alone may not be enough. To ensure that both your down-market brand and your core brand are successful, you need to actively promote why your core products are worth their markup. Consider the repositioning of P & G’s diaper brands in the 1990s. In response to the increasing threat of private label competition, P&G realigned Luvs as a combat brand, cutting the price by 16%. Even when P&G cut features and advertising for Luvs, the low-cost brand initially cut sales of P & G’s high-end Pampers. It took significant investment in promoting and improving the premium character of Pampers before P&G could successfully keep both brands side by side.

4. Explore different sales channels. By creating value tiers, companies can show that premium offerings are more desirable. At the same time, the juxtaposition of offers with different prices often pushes customers into the middle. If the focus is less on defensive use of your brand in the lower end of the market and more on building a loyal customer base, it can make sense to develop a strategy that counteracts the propensity to choose the middle offering. One way to do this is to sell your up and down market products in different ways. For example, consider Salem Five, a Massachusetts-based retail bank. In addition to its traditional website, Salem Five operates its own no-frills site devoted entirely to personal online accounts. The specialized site is aimed at a group of customers who can help the bank cut costs – by foregoing paper statements and personal assistance – in exchange for better interest rates.

5. Gain positive reviews quickly. Getting lots of early advertising can be useful. However, sustainable success depends on receiving positive reviews from the right customer segments. These customers should be able to quickly convince your target audience that your cheap product was designed to excel in important performance dimensions. They can convey that your product is really designed for them. Although the launch of the iPhone 5c received a lot of speculation and criticism, its ability to convert large overseas Android users has helped Apple expand to a new type of user. For example, sales of the 5c in Europe in the months leading up to the launch of the iPhone 6 helped boost Apple’s sales at a time when the company’s core crowd weren’t buying.

Now that we’ve seen some successful strategies for reaching lower end customers without harming your brand, let’s see how the Mercedes CLA fares on these five criteria:

1. Distance to the core brand – Mercedes makes no attempt to distance the CLA from the rest of its program. Opinions about this car are likely to shape the minds of buyers across the brand.
2. New type of customer – Mercedes is doing well and rightly trying to attract young professionals who could become loyal luxury long-term buyers.
3. Different grades – The difference between the different grades is pretty minimal in the end. In fact, a well-equipped CLA can end up costing more than a base-class C-Class.
4. Different sales channels – We noticed very few differences in terms of sales and marketing strategies for the CLA, which is consistent with the decision to tie it to the Mercedes brand.
5. Early Positive Reviews – This is where Mercedes coincided with some influential critics. As one Consumer Reports tester put it, “I would … use a real BMW instead of a fake Mercedes.”

While different industries and product lines require unique strategies, Mercedes appears to have created a lot of brand risk for a short-term boost that has already subsided. Carefully differentiating your brand in the lower end of the market to create and deliver value to identifiable types of customers can help keep your company from making the same mistakes.

Contribution to Branding Strategy Insider by Steve Wunker, author of JOBS TO BE DONE: A Roadmap for Customer-Centered Innovation, and David Farber

The Blake Project can help you create a better competitive future in the Jobs to be Done workshop

Branding Strategy Insider is a service from The Blake Project: A strategic brand consultancy specializing in brand research, brand strategy, brand growth and branding

FREE Publications and Resources for Marketers