Consumer-focused companies have long built their business models on a three-platform system: entry-level, mid-tier, and luxury. It works for cars (see: Chevy (GM), Buick, Cadillac) and it works for clothes (see: Old Navy (GPS), Gap, Banana Republic). Why wouldn’t it work for paper towels, detergent, and tampons?
Procter & Gamble (PG) in the past 18 months or so has been betting heavily that it will pay off. The consumer-goods giant is expanding its high-end offerings in a bid for affluent—or at least spendthrift—customers. Call it toilet paper for the 2 percent, paper towels for the pampered.
Consider P&G’s Bounty brand. Where once there was a single product, albeit in various sizes and packages, now there is Bounty Basic (the cheap-o version) and Bounty DuraTowel, the luxury offering released in February that sounds like something that belongs in the tool section of Home Depot (HD). These things are pitched as an alternative to dish clothes, even though they may be more expensive. Soap.com is selling a six-pack of DuraTowels for $10.25. A consumer who buys eight rolls of DuraTowels would pay a 46 percent premium over the mid-tier offering—and roughly double the price of Bounty’s Basic product.
The strategy is a tidy example of what business school professors call price segmentation—the science (and art) of separating consumers by willingness to pay. Why should P&G sell one kind of paper towel for $2 per roll if one-third of its potential customers would gladly pay twice that amount? The real skill, however, is making sure that folks willing to buy the pricey products don’t drift down to the mid-tier offerings. That’s why DuraTowels come in different colored packaging and are often stocked far from Bounty’s other offerings.
The gambit has a secondary benefit as well: Buyers of the cheapest products are more likely to trade up to the mid-tier once they see a third, even more expensive offering.
Not surprisingly, P&G is adding premium products throughout its closet of brands. As of February, its Cascade dish detergent comes in three grades of effectiveness: “base,” “complete,” and “platinum,” (PDF) which is pitched as a way to clean the dishwasher, as well as plates and glasses. Tampax, meanwhile, now comes in an expensive Radiant model, in addition to its Pearl, Essentials, and lowest-end offering, which is ridiculously named Cardboard.
The strategy, though relatively new, appears to be paying off. P&G’s profit in the recent quarter increased 7.6 percent, to $3 billion, while sales rose 2.2 percent, to $21.2 billion.