Private label brands are hindered in ways that other brands typically are not, simply by virtue of the fact that they are private label brands. In general, private labels (PLs) will be faced with lower perceived quality, lower levels of trust and higher perceived risk on the part of consumers. Actual objective attributes, including product quality, are not typically relevant – these initial, instinctive, pervasive and firmly held perceptions regarding private label products are entirely independent of objective product attributes. To understand why this is, one must first understand a little about how our brains work.
Perceptual categorization is the process by which individuals organize external stimuli or objects into cognitive memory structures to enhance information processing, efficiency, and recall. They allow us to quickly interpret and give meaning to new information as it becomes available (Cohen, 1987; Aribarg 2014). Categorization is not something that is limited to products, rather “
Categorization is considered a fundamental cognitive activity encompassing all forms of stimulus situations” including people, places and things.
Categorization is essentially functional in nature; in enables us to easily store and retrieve information from memory, as well as react more quickly to new information. We can be more efficient because we evaluate, draw inferences and make judgments based on category membership, and thus do not need to evaluate every object based on its specific characteristics. To oversimplify, categories form the underlying basis for consideration sets, from which selections (product or otherwise) are ultimately made.
These “memory structures” are composed of similarly perceived or judged objects along with knowledge that pertains to the objects in that category. So we not only build categories, we define what that category means, i.e. the category and its membership is not based simply on what objects are called, but on other attributes that individuals find useful in making judgments about them. Thus, for example, all diet soft drinks are likely to be part of the same category, and grouped due to perceptions regarding low calorie and (for some) an off-taste. Similarly, compact cars may be a category (limited leg room, cheap), as well as specific stores for which you have a preference (variety, styles, bargains, etc).
As new objects arise they are typically placed into pre-existing categories, or, if necessary, a new category or subcategory is formed (Aribarg, 2014). Categorization of new objects is basically a process by which a comparison is made based on attributes of available categories and the new object or “target.” If one were to encounter a fast food restaurant in another state that was unfamiliar, it would be categorized in some kind of fast food category, and prevailing assumptions regarding fast food restaurants would be “attached” to that new restaurant object.
Thus, the categorization process has significant downstream impacts on attitudes that are formed about the category “members” and new objects that are likely to become part of it. Once an object is placed in a category, associations that identify it and define the category are pulled from memory and applied to the object (Aribarg, 2014; Cohen, 1987).
There are a few theories about how new objects get categorized, and how they inherit other characteristics of that category. In some theories, a specific category “exemplar” is retrieved and compared to the new object (e.g. “this seems a lot like The Gap”). In others, the new object is compared to a stylized or composite of all category members (e.g. “fast food places have filthy restrooms”) (Cohen, 1987; Aribarg 2014). What is of particular interest is the fact the people rely on those categories to make generalizations that are based on perception more often than a detailed point-by-point comparison or understanding of the attributes of an object.
Categorization suggests a relationship between a consumer and an assortment of products with common properties, around factors beyond brand attitude. Of particular significance is the fact that consumers tend to rely quite heavily on price, brand name and packaging for product categorization (Aribarg, 2014).
Brands, while not categories in themselves, are situational cues that can evoke and facilitate the retrieval of exemplars or stylized representations from memory. In most consumer environments, speed is of the essence and individuals are often tasked with making decisions with limited information and thus often turn to cues to help make decisions (Aribarg, 2014). These cues, often referred to as “heuristic devices,” enable a rapid but typically accurate judgment about something based on limited information. In the political world, for example, the cues of party identification “Democrat” and “Republican” give voters a sense of what a candidate stands for even in the absence of specific information about the individual and his or her policy positions. The specifics of a product are even less likely to be considered when speed is important, information is limited, or risk is perceived to be minimal (Cohen, 1987). Categories enhance (and are indicative of) the use of cues for decision making.
However, it appears that learning about products over time can enable us to make distinctions based on actual product differences, and this learning typically takes place as a result of product usage. Because “…shifts in brand consideration are likely related to how consumers categorize brands in a product category” (Aribarg, 2014), learning can lead to shifts in perception. These factors are important when we consider various positioning options for private labels.
Of greatest significance for our purposes, private label brand (PLs) and national brands (NBs) have been shown multiple times to occupy their own distinct perceptual categories in consumer minds (Aribarg, 2014; Nencyz-Thiel and Romaniuk, 2009 and 2014). This is not to say that the products or brands are the categories, what this means is that consumers maintain categories called “national brands” and “private label” and then apply those categories to objects as they encounter them. The same holds for brands as well, a brand itself can be placed into a perceptual category, which has associations that then flow to the brands and the products.
The key for our purposes is that “…private labels form a subgroup in consumers’ memory, with low price and low quality as the main drivers of this categorization.” (Nencyz-Thiel and Romaniuk, 2009). Pricing as a driver of categorization is particularly strong but given the purpose of most PL products (saving money), this is often seen as a plus. However, the key issue is that PLs tend to be evaluated based on negative attributes rather than positive ones, particularly by non-users. “Low quality was the strongest negative driver for PL and NB categorization, with risk a close second” (Nencyz-Thiel and Romaniuk, 2009). This is not to suggest that the PL products are poor quality, just perceived as lower than the national/name brands. Along the same lines, having many product categories under a single brand is a giveaway that the products are PL, and aids in consumer categorization. (Szymanowski, 2012; Quelch HBR 1996). Consider Kirkland Signature, the unendorsed but patently obvious private label from Costco. The fact that the brand covers toilet paper, chicken, olive oil and men’s shirts is an unmistakable sign that it’s a private label brand.
The fact that PLs tend to have low quality and low price associations are likely due in part to the fact that they have been specifically positioned this way for 30 years. It’s typically the major selling point, indeed the reason for being, of a private label product. (Nencyz-Thiel and Romaniuk, 2009).
In sum, research findings validate that customers make distinctions between NB and PL based on price, quality, and trust/risk at the level of the subcategory in ways not typically favorable to the PL.
Consider the following comment from a Fortune 500 sales executive:
“A [NB product] comes out of the box with a problem, and for whatever reason our reps and customers just deal with it as a one off problem. One of our [private label products] comes out with an issue, suddenly all parties want to jump back into the name brands.”
The “whatever reason” becomes clear in the context of perceptual categories. The private label product is a member of a PL category and the other product is a name brand. By virtue of its categorization, the NB has attributes like high quality associated with it, thus when one fails it must be a “one off” issue. The PL has already had key attributes associated with it at the category level, in particular low quality. Whether such an association is justified is entirely beside the point. When the PL product fails, the categorization (perhaps in conjunction with our well known confirmation bias, where we select only the facts that support our preconceived beliefs) validates the overall category association of low quality, and thus is more likely to be seen as something indicative of all PL products and not a one off incident. Thus literally identical situations are evaluated in fundamentally different ways.
One simple study illuminates the issue particularly well, and has been replicated multiple times. Participants in two random samples tasted orange juices from a national brand and store brands (De Wulf, 2005). The only difference between the two groups was that one was a blind tasting and one was non-blind (tasters could see what brand they were tasting). In the blind survey a store brand won easily, Minute Maid (the NB) finished next to last. But in the non-blind tasting, Minute Maid finished first. The pre-conceived notion that the NB must be of higher quality was so powerful that it was able to override the very tangible evidence of actual taste. Consider how a PL product would do if the evaluative criteria were more abstract, like trust or value. What chance does a PL product have to overcome such a bias when the evaluative criteria are less tangible, more likely to be based on a cue, and the individual has not even had the opportunity to actually use the product?
To make matters worse, there is also a substantial halo effect (a negative one) which refers to the unconscious transfer of attributes or positive feelings to other associated products. “[C]onsumers use their experiences with one [PL] brand to update their beliefs about rival retailers’ brands, and these spillovers are quite sizable” (Szymanowski, 2012). So customer perceptions of other vendor’s brands, how they categorize them, and the associations that they make all have an impact on one’s own brands.
These spillover effects are entirely independent of “true” quality differences. Efforts on behalf of one manufacturer to enhance the quality of their proprietary brand will encounter perceptual category challenges that are likely created and maintained at the category level due to the poor quality of another vendor’s PL items. “The managers of PLs [private labels] must take this difficulty into account when planning repositioning strategies, or the introduction of PLs that differ from this stereotype” (Nencyz-Thiel and Romaniuk, 2009).
What about “quality” private label brands? Some research indicates that customers are starting to change perceptions regarding the quality of PL products, and indeed a large majority of consumers believe that the national brands are typically the maker of proprietary brands. Some manufacturers have gone to a tiered strategy, where the top tier products can arguably meet or exceed the intrinsic quality of the national brand.
However, despite some evidence that suggests that higher quality PLs are making inroads, academic research based on empirical testing indicates customer expectations regarding PLs still reflects historical positioning – namely that customers expect them to be lower quality. The key issue is perceived quality rather than objective quality. Arguably objective PL quality is on par with NB (and several studies have validated this), but “evidently, consumers’ knowledge has not kept up with this change” (Boyle and Lathrop, 2012). Another significant consideration is the complexity of the products in question. It is easier for simple products to achieve quality parity than it is for more complex products, which may account for some surveys which suggest consumers perceive little quality differences in NB and PL products. This subject remains something of a gray area, with academic empirical testing suggesting perceptions of lower PL quality, while more anecdotal evidence from marketing consulting firms seems to suggest perceived parity. Ultimately what matters is product selection in real world situations, and it appears that when put to the test consumers still maintain a perception of lower quality for PL, and they expect a pricing differential to compensate.
Usage may provide a key link between the well-established perception of PL (low) quality and recent arguments that PL quality is, in some cases, as high or higher than NBs and is perceived as such by customers. Research consistently validates that low price indicates PL (or that PL indicates low price) and both indicate low quality. But some Kirkland (Costco) brands and others are successful with products that are not so easily grouped. Usage seems to mitigate some of the issues with trust in particular (i.e. actual usage of a product alleviates trust issues). Learning through usage may be the key to understanding how “high quality PL” might become perceived as something other than an oxymoron.
There are a few strategies that appear to help diminish the perceived quality gap for consumers. Though re-categorization is highly unlikely, research shows that tactics such as an “invitation to compare” and high quality advertising have helped reduce the perceived gap in quality. The “invitation to compare” is typically seen on consumer products, usually in the form of a phrase on packaging such as “Compare to the active ingredient in Advil.” (Boyle and Lathrop, 2012). Actual comparisons by the customer are not usually necessary, the phrase itself is usually sufficient to make the point. What is particularly interesting is that the invitation to compare often signals to the consumer (whether rightly or wrongly) that the NB is actually the manufacturer of the PL product. True or not, it reduces the gap in perceived quality and trust.
Along the same lines, national advertising of PL products has a similar effect. It is not actually the content of the advertising that matters, it is the confidence that is exuded simply by the fact of advertising in a very bold and public way. The effect on consumer perception regarding who actually makes the PL product is similar to the effect of the invitation to compare. See “Signaling Theory as a Private Label Brand Strategy” for a more detailed examination.
Given the foregoing, there are three main positioning options for PL. One is to intentionally position private labels as private labels and effectively embrace the product status as PL (“PL as PL”). Within this option one can then position against national brands (PL as PL vs. NB, i.e. “same for less”) or against other PLs (PL as PL vs. PL, or “less for less”).
Another option is to attempt to hide the product or brand’s status as a private label and position the PL as a national brand (“PL as NB”), and work to position it with all the attendant quality, price, and trust associations that go along with it. Here the realistic option is limited to positioning against other NBs (PL as NB vs. NB).
PL as NB vs. NB
In this scenario one would position PL products as “just another national brand,” for example Husky tools from Home Depot. The challenge here, of course, is that brands may already be known to customers and, if so, their status as PL products is probably already established. As noted previously, re-categorization is highly unlikely but one might opt for this position if there are significant brand or product line extensions in the future, or if there is an intended upward repositioning in the works.
Despite the significant challenges, if this is the chosen route there are a few tactics to employ. To the extent that they are not already categorized, one would want to do everything possible to prevent the categorization of PL brands into the perceptual categories customers already have formed around PLs. One would want to remove or hide overt indicators of PL status. Phrases such as “Exclusively Available at…” are likely to be seen as indicators of PL status and should be removed from use. As noted earlier, having many product categories represented by a single brand is another significant indicator of PL status. While moving product lines between brands in likely a cure worse than the disease, it seems prudent to promote disparate products lines separately, even if they share the same private label brand. Rather than having a specific campaign that lumps all PL brands and products together, one might consider a brand-focused campaign that focuses on single or at least closely related categories that are likely not incongruent with each other in the minds of customers.
If an attempt is made to reposition existing private labels as NBs, any existing customers and sales reps will have PL brands and products in specific perceptual categories, and there will be multiple challenges with changing their minds. In this instance one needs to utilize the tools available to get customers to rely less on heuristic cues and more on specific attributes to make assessments. Usage is one factor that has been shown to improve levels of trust, so an aggressive (and no doubt expensive) sample program should be considered. Quality assurances via influencers or validated by a third party such a JD Power or Consumer Reports may also assist with learning.
Price is a key indicator of PL status, but this is a bit more complicated. While low price is a key driver or identifier for consumers of PL status and categorization, simply raising price to counter this effect is a questionable strategy. In general, price elasticity of demand for PLs is greater (specifically “more elastic”) than for NBs, due to the perceived quality differential. Demand is more elastic when changes in price have a relatively large effect on the quantity of a good purchased. Because of the other cues available to consumers that a product is PL, if raising prices (along with other efforts to “erase” PL status) do not effectively move the product into the NB category, the negative effect on sales could be significant. Essentially, if a price goes up for what is still perceived to be a lower quality product, the consumer is likely to purchase less.
Keep in mind, of course, that for most consumers the lower price of the PL product is the “reason for being” for a PL; they specifically want a product that is less expensive and (historically) have been willing to forgo certain features or endure a greater perceived risk in order to obtain it.
Other than usage, which encourages or at least enables evaluation based on intrinsic qualities, it is essential to signal quality in extrinsic ways: increased (and high quality) advertising and packaging are two ways often cited to assist evaluation efforts on the part of customers. In essence, it is critical that every effort is made to get customers to modify their judgments that would typically be made based on category associations. It likely won’t let PL products out of the PL bucket, but it may aid in learning, encourage trial, and shift typical PL associations.
PL as PL
With “PL as PL” no effort is made to hide the fact that private label products are private labels. Examples would be Lowe’s AquaSource faucets or Safeway Select products. A company can tie itself to the private labels with the use of a corporate endorser (e.g. Trader Joe’s products), and not be concerned about the cues like price signals or the number of product categories under the various PL brands. All are clear indicators of PL products, which in this case is a good thing.
PL as PL vs. PL
While it may be possible to position PL as a “better private label brand than the competition’s” the well-established halo and spillover effects suggest that efforts to do so would be counteracted by the fact that one company’s brands would be categorized with all PL products, including those of competitors. However, despite the spillover effects, as noted earlier it does appear that some objects are “less representative” of the category than others and there may be the capacity to make modest “within-category” distinctions between private label brands. That is, it may be possible for consumers to make slight distinctions between products and brands within the PL category.
With the “PL as PL vs. PL” strategy one can still use tactics such as a sample program. The goal is to convince customers that the product is good enough for their needs, especially considering the price. As noted previously, PL products have historically succeeded because customers are willing in specific circumstances to make known tradeoffs to save money. Customers interested in PL are likely engaging in “satisficing”, which is “a decision-making strategy or cognitive heuristic that entails searching through the available alternatives until an acceptability threshold is met.” (Wikipedia) Individuals do not necessarily look for the best possible option; they look for the first one that meets their needs with the least amount of cognitive effort. As noted previously, actual product usage achieved with samples should help mitigate some perceptions regarding suitability.
PL as PL vs. NB
This is probably the most common positioning scenario, but positioning as PL and deliberately acknowledging the product’s PL status while framing against NB is challenging.
On the plus side, this strategy does not require trying to overcome all the PL cues presented to customers on a regular basis (price, number of product categories, exclusively available at, etc). On the downside, PL and NB products are already going to be in different perceptual categories; and if they aren’t already, overtly positioning them as PL will ensure that it happens.
A position of “same quality for less” is unlikely to gain much traction with customers based on the categorization that has certainly already taken place. If ads and other extrinsic cues cannot effectively re-categorize products in customer minds, this position ultimately may actually just be a generic “PL as PL” strategy, and the process of attempting to frame against a specific NB competitive position is simply futile. At a minimum it will be a long road, and success depends upon extensive usage and learning.
However, this fact may result in what is arguably a more tenable position, playing into the “satisficing” tendency and essentially positioning as “the level of quality you need and expect, for less.” It doesn’t fight the perceptual categories, and it plays into the historical positioning of PL. The downside here is that it potentially diminishes PL products that are arguably equivalent in quality or features, and perhaps most importantly it demands a price that makes the perceived risk worth it. This is discussed in more detail below.
How one positions PL product lines has a significant impact on how the brands are extended and how to grow the business. If one were to choose to position PL as NB, it influences how many disparate product categories one can reasonably attempt to put under any one brand name. And building many individual brands in order to avoid the PL perception can get very expensive. Similarly, if you position PL as PL, it suggests adding products or product categories that are more amenable to extrinsic cues rather than detailed product knowledge.
There appear to be general categories where PL has greater penetration than others. (Gruver 2011, Bridge Strategy 2010). Bain examined penetration rates by 10 category characteristics (Gruver 2011). Those of particular interest in light of the foregoing research include Perceived Risk (high perceived risk correlates with low PL penetration), Frequency (low frequency purchases are less likely to be PL), Innovation (which in this context means frequently bringing products to market), and Media Spend.
This suggests a few things for future expansion of private label product lines. Highly complex, less “commoditized” goods, especially if purchased infrequently, are less likely to achieve high PL penetration rates. The higher the perceived risk of the purchase the less likely a customer is to utilize simple associations, heuristics or categories to make a purchase and the more likely they are to lean towards NB (actual quality is typically not relevant).
Thus “fast movers” where quality is either less important or more easily gauged with extrinsic factors (and less dependent on simple categorization associations) might be the best candidates for future expansion.
A specific positioning recommendation depends on the goals and objectives of internal stakeholders. For example, if Sourcing strongly believes an opportunity exists in air conditioners (for example) then positioning as an NB may be a better route to go due to the complex nature of the products. Conversely, if Marketing believes that the best route to success for PLs is to amplify their status as PLs rather than try to hide it, then it has implications for what products and product categories Sourcing should add and how they are priced. PL as PL should typically require a more readily apparent price/risk premium, although very complex products may (hypothetically) actually increase the likelihood that a product is perceived as a relabeled NB, and thus may require a relatively low price differential. See figure below.
Private label/proprietary brand products have historically existed as a way for customers to save money. The foregoing research indicates that the tradeoff for saving money is products that are perceived to be of slightly lower quality and reliability. Whether the quality or reliability is in fact lower is not relevant, it is the perception that typically adheres to the products. Thus there is a “reverse risk premium” calculation that occurs, where a customer evaluates the amount saved relative to the perceived risk involved in making the purchase. Where the cost savings meet or exceed that premium, there is perceived value in the purchase. High priced PL products where the savings are minimal would be less successful, but in less complex goods smaller price differences may be sufficient to drive sales (due to lower perceived risk).
So while there are options available for PL positioning, the key is that they be coherent and in sync across the business, ensuring that the positioning strategy matches with the sourcing and marketing strategy of current and future private label brands.
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