Premium brand managers face a constant dilemma. How do you develop a high-end brand without killing its soul – the brand’s unique cachet that attracts its major customers who pay high prices – even if you are looking to expand sales to the masses by offering lower prices? In recent years, outlet stores located hours away from glitzy shopping districts, selling off-season and below-grade merchandise at a fraction of usual retail prices, have proliferated and have become important sources of income. The misconception is that relying on income from outlet stores can destroy the brand’s cachet over time. But according to a study to appear in the journal INFORMS Marketing Sciences, one of the leading trade journals in marketing, outlet stores can actually help improve the brand’s cachet.
The study, “Why Factory Outlets Exist: Avoiding Cannibalization in Product Line Extensions,” was written by Donald Ngwe of Harvard Business School.
Ngwe analyzed five years of customer sales data spanning over 16 million customers and 27 million transactions from a large US high-end fashion company with hundreds of regular and factory outlets across the country. He found that the brand’s main customers are hard to want the latest products and are willing to pay higher prices, but are unwilling to travel very far to buy the brand. In contrast, the greater mass of customers who aspire to consume this brand, but are price sensitive, are not only willing to travel long distances to factory outlets, but are also undemanding in their tastes to the latest products and ready to tolerate low quality. Hence, outlet stores increase their income with limited cannibalization of the income of the highest paying customer base.
Taking into account this strong negative correlation between taste for quality and new products and willingness to travel for shopping among the base and mass segments, Ngwe modeled the company’s product introductions in regular stores. and factory outlets. He found two key results. First, the availability of outlets to sell older products to mass consumers means that businesses can take more risks and introduce more new products at faster prices to their regular stores. Second, as outlet stores absorb the customer base of price-conscious customers who need less service, the business can invest in better service in regular stores. The introduction of new products in regular stores is increasing by up to 16 percent. Ngwe said, âHere is the kicker. Even though the outlet stores generate significant income from the masses, they help the brand to increase its cachet among its major customers through more new products and higher service. “
The misconception that factory outlets can harm the health of an upscale brand stems from the failure to recognize the positive impact of outlets on mainstream retail outlets. Ngwe noted, âFor the brand we studied, there is little cannibalization of regular store revenue by outlet stores. In addition, factory outlets have a positive impact in terms of higher service and more frequent new products in regular stores. is to increase the brand’s cachet. “
However, Ngwe cautioned, âWhat is critical to our conclusion is that major customers would not buy from factory outlets due to their aversion to traveling long distances. cannot use the travel distances to separate their core and mass customer segments. Premium brands online will need to find other ways to differentiate their premium and mass offerings. “
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Materials provided by Institute of Operational Research and Management Sciences. Note: Content can be changed for style and length.