What Makes Consumers Pay More for National Brands than for Store Brands - Image or Quality?
40 Pages Posted: 7 May 2002
Date Written: March 15, 2001
Private labels or store brands have become a major force to reckon with in grocery products.They account for over one-fifth of total volume sales in the United States and are growing faster than national brands. Generally, prices of national brands are higher than store brand prices. Therefore, a consumer would purchase the national brand (store brand) if the premium s/he is willing to pay for the national brand over the store brand is more (less) than the actual price differential between the two brands. Thus our understanding of why some consumers purchase national brands and others purchase store brands would be enhanced by gaining insights into why consumers are willing to pay a price premium for national brands over store brands.
In this study, I attempt to understand why consumers are willing to pay a higher price for national brands than for store brands in grocery products. Is it because of perceived quality differential or non-quality utility? Non-quality utility is defined as the price premium that consumers would pay for a national brand over a store brand even when they perceive the quality of the two brands to be the same. The utility arises from positive brand image, brand associations, or brand equity.
The study draws upon a general utility framework and develops an econometric model for separating the total price premium that consumers are willing to pay into three components -perceived quality differential, quality sensitivity, and non-quality utility. The econometric model is estimated using a survey that collected information on what consumers reported that they are willing to pay for national brands vs. store brands. The data set consists of 2237 observations from 132 consumers on 20 grocery products.
The key qualitative insight is that perceived quality differential and non-quality utility or brand image dominate in different stages of the purchase process. Perceived quality differential or acceptable store brand quality is the primary driving force in a consumer's decision to participate in or consider store brand purchase. However, when it comes to deciding how much more to pay for national brands over store brands, brand image or brand equity is the dominant factor. In fact, consumers will pay a reasonable premium for national brands even if they perceive the national brand and store brand to have the same quality. This finding represents good news for national brand managers because it allows them to command a reasonable price premium even when retailers close the quality gap. National brand managers should maintain and increase their brand's equity through frequent and effective advertising and other equity-enhancing strategies.
Retailers should recognize the importance of national brand equity and set their price differential appropriately. Just because retailers have closed the quality gap does not mean that they can close the price gap and maintain a low price differential. They should also not set the price differential too high and charge a low price for store brands since low prices may create negative brand associations for the store brand. The paper also discusses several other finding and their implications for segmentation and promotion strategies for both manufacturers and retailers.
Suggested Citation: Suggested Citation