A key business strategy challenge is raising consumers’ willingness to pay. There are huge gains to be made if you can persuade customers that your product offers much greater benefits. Several authors have spoken about the idea of Trading Up, whereby seemingly unglamourous product markets are altered by the emergence of high-end, boutique-style brands.
This article explores the experience of just such a firm – Mighty Leaf, a firm based in San Francisco who have developed a wide range of exotic sounding and attractively packaged teas. They appear to have ticked off all the required boxes so as to appeal to their target consumers: biodegradable materials, obscure flavours to request (pu-erh anyone?), and ample theatre at purchase.
The economics for their major customers (i.e. restaurants) looks very, very appealing also:
Mighty Leaf spends 20 cents on an average tea bag – the couple contracts out the production of the bags. It then sells its bags at an average 40 cents. Is the restaurant going to complain about the price? No. The theatrics enable it to sell the resulting beverage for up to $7.
This is a clear example of effective differentiation. As the article notes, Might Leaf’s success is attracting the attention of the big tea brands. In many ways, this is comparable to the attempts by large scale beer brewers to elbow in on the microbrewing (or craftbrewing) niche. The challenge for the big players is gaining legitimacy in the eyes of consumers who are paying not just for the product itself but also for the experience of engaging in something distinct or exclusive. Of course, the larger firms often have huge cost advantages spring from economies of scale and scope (for example, you would imagine they could dramatically reduce the costs of getting the teabags to the restaurants, and also target a lot more restaurants through their existing distribution networks).