How do upmarket brands resolve the conflict between the need to grow their topline and having to go down-market to achieve that? Hidesign, the leather bags maker, provides a neat example of the dilemma.
For 25 years, it made top quality men's office bags. Owning these became a status symbol for men not only because the bags looked so nice, but also because the price was high. Then in 2003, four things happened, three of which kept on happening till 2010 and then slowed or stopped; the fourth has gone on happening.
First, thanks to economic growth accelerating in India, the upper middle class expanded.
Second, therefore, not only were more people earning now, they were also earning more.
Third, inflation became muted at around 5 per cent.
Fourth, women displaced men as Hidesign's main market. This is still the case while the first three factors almost disappeared after 2008.
Taken together, this has meant there are more people in the market for leather bags. That, in turn, has meant there is more money to be made by making and selling them.
Tough choice
Hidesign was now faced with a choice. It could either stay small, trendy and expensive; or it could become bigger, highly affordable but as a result less trendy.
At the same time it didn't also want to dilute the brand by selling multi-coloured handbags to yesterday's hoi polloi. So it has kept an arm's length relationship with its handbag brand called Holii.
This way it hopes to get the revenue from the masses of the middle class while protecting the mother brand for the upper classes. Will the strategy work? Only time will tell.
The unanswerable question is: How do you define the upper classes and therefore, how much can you charge them for snob value?
The answer lies in the economics of competition between multi-product firms which try to cater to different segments of the market.
Compete with yourself
Economists have analysed the phenomenon threadbare and, to the extent that they can ever agree, concluded that:
a. Buyers of lower-quality look mainly at the price but will pay a premium for the brand; and
b. Buyers at higher prices look mainly at quality and may not pay a premium.
My own conclusion from these findings is that a brand tends to become less relevant as you clamber up the coconut tree.
That is, if it is a cheap variant I am looking for, I will worry about the brand; but if it is a high-quality thing I am in the market for, I will not care so much about the brand.
Indeed, that is how new brands get built.
In short, multi-product firms, in their quest to boost the topline, tend to kill the goose that lays the golden egg because the rich turn up their noses, so will the less rich sooner or later.
Thus, if five million Chinese are buying Louis Vuitton bags, at high prices, what is LV doing to its brand? How long before it is passé to carry a LV bag?
Brandbust?
This problem is not confined to bag makers. Soap- wallahs as well as hotel- wallahs , car makers as well as computer makers face it because if your maid can afford a downmarket version which has an upmarket version, it doesn't make you feel great if you have the latter. After all, the label is the same and only a few know the difference between your version and your maid's.
It's like flying: The difference between business and economy is tiny – only those on the plane know you flew business – and the guy in economy thinks you are a fool for paying three times as much for sitting in the same aluminium tube.
(T. C. A. Srinivasa-Raghavan is Senior Associate Editor, The Hindu Business Line.)