Going Premium

Every now and then, I’ll see a conversation online about a successful brand or retailer where a commenter will say something about how excited they are to see when the firm goes premium: offering more expensive products, like gold-nibbed or high-end pens. It’s almost always expressed as an inevitability, like a star athlete moving up to the big leagues, and yet it almost never happens in reality. In fact, the opposite seems to occur more frequently: brands that were once premium like Parker and Waterman barely compete in the upmarket space anymore. In today’s post, I thought it would be interesting to explore why firms aren’t always so eager to make the move upmarket, and look at Goulet Pens and Twsbi as two case studies.

The simple explanation to all this is that businesses specialise. Whether they are specialising in a particular type of product, customer, or business function, there’s something that they can do better than anyone else. For a business to become larger and hopefully more profitable, it has two choices: expansion or growth. It can try to add additional specialisations and expand: for instance, a retailer that specialises in their local market opening a new store that serves a different market, or a low-cost brand that decides to start making some premium pens. Alternatively, a firm can try to grow by leveraging their existing speciality in new ways: the local retailer finding more products that their customers want, or the low-cost brand expanding sales into new countries.

In my opinion, neither approach is absolutely better than the other; there are times when growth is preferable and times when expansion is preferable. But expansion is certainly harder to achieve: it’s hard for anyone to come up with a single specialisation that works (look at all the businesses which fail in only a few years), let alone a second one. To demonstrate this, we’ll consider two case studies of businesses and why going premium – and expanding each business – might not be the best approach.

Everyone knows Goulet Pens and their reputation, so I won’t rehash it here (though you can see my analysis of their business here), but I will say that their strategy is centred around a particular customer base. The business seems to have developed a deep understanding of that group and been built around serving their needs as fully as possible – the product range, the Ink Drop program, the support videos. Their consistent, disciplined focus on one particular group is unusual for SMEs and wonderful to see. I get a strong sense that someone central to the business – almost certainly Brian Goulet himself – has decided that he would rather do an amazing job serving one group of customers than a good job serving two, or a mediocre job serving more.

It’s an approach that obviously demands volume and becomes more successful as volume increases. It’s no surprise to see new brands (particularly Faber-Castell) joining the product range this year, but I suspect Goulet might feel like they’ve started to reach the natural boundaries of what they can offer their customers in this particular space (entry-level and advanced FPs). To keep growing the business, a decision had to have been made about whether the next move would be into rollerballs (RBs) or upmarket FPs (perhaps Graf von Faber-Castell or Pelikan Souverans), and it appears that RBs won the day.

But why would a business built around FPs – and the fanaticism of FP users – prefer to shift into RBs than increasing their FP range? I think it’s all about serving their current customer base as fully as possible. While there are some purists in the community (perhaps a lot of purists), most of us can’t use FPs exclusively and keep a few pencils and pens around the house and office. Offering a range of RBs allows Goulet to broaden their service to that group, from FPs and accessories to something more like general stationery.

Moving into upmarket pens is an entirely different proposition. I’ve written before about the gap between the advanced pens (which top out around $200) and the upmarket pens (from around $400). There might be a few customers who are active in the advanced space and willing to buy premium pens but, by and large, it’s an entirely different customer, with different needs and different expectations. Goulet’s understanding of their current customers gives them a powerful advantage, one that is totally lost when moving to serve a different group of customers. While that same level of understanding could potentially be built up around the premium buyers, it will take years.

Another challenge is the differences between the two markets. The high-volume model doesn’t work as well with the premium range (though Chatterley Luxuries is – arguably – giving it a red hot go): purchases are not made as frequently but you have to keep products in stock anyway, meaning that your inventory costs are higher. Your margin needs to be higher to cover these costs, pushing prices up and further reducing the frequency of sales.

The style of selling is different too; simply providing information online with helpful videos is fine for mass-market sales (Goulet being our industry’s idea of mass-market) but premium sales require a more personalised approach. Buyers have an expectation that advice will be well-informed and unique to their situation. One of the reasons I buy from La Couronne du Comte is because the manager, Dennis, knows my preferences and can offer reliable advice about whether a particular nib will suit me. That kind of service is hugely beneficial but it's also expensive to provide, putting additional upward pressure on prices.

Finally, there is the implicit cost of a management team trying to focus on two different groups of customers, with different product ranges and different needs. This leads to problems of priorities and resourcing, each of which drains a manager’s time and ability to focus on the big picture. And all of this is before you even contemplate the different style of competition in the premium market and the other firms in the space.

Needless to say, I think Goulet obviously made the right move. In fact, I wonder if this was even something they had to think about: while it’s obviously a good idea to fully consider the alternatives of any decision, the strength of the focus on their current base means I would not be surprised to hear that moving upmarket wasn’t really on the radar.

Twsbi (which I've also analysed) is another good example of a successful business that is focussed on growth rather than expansion. Their speciality isn’t a particular customer group but innovation that allows them to get their production costs down and sell piston- and vacuum-fillers at extraordinarily low prices. While it’s relatively common to hear comments about how Twsbi should (or eventually will) offer a gold nib option or a high end pen, this is essentially saying that the company is good at one thing so they should try to do something completely different. It certainly has the potential to work out, but I think the odds are against them.

An upmarket pen has a few characteristics that are different to the entry-level and advanced pens, such as design. Most premium pens have a distinctive design aesthetic: think about the classic shape of a Montblanc, a Souveran’s flat top-and-tails, the presence (and clip) of a Visconti, or the unique styling of a Nakaya. These designs are part of what attract buyers and what makes them willing to pay premium prices. It’s not clear to me that Twsbi has much strength in the design department; their pens are functional tools, not art, and it would require an substantial investment on their part to develop the necessary strength in design to make a premium pen.

The same goes for the materials: say what you will about Montblanc’s precious resin, but it remains glossy after months of use without polishing. The same goes for Nakaya’s urushi, Graf von Faber-Castell’s tasteful combination of chrome and wood, or Visconti’s lava barrels. The plastic Twsbi uses in their demonstrators is solid and (generally) reliable but it’s a long way from providing the tactile pleasure experienced when handling something premium. Twsbi arguably have a real strength in understanding and working the plastics (and aluminium) that they currently use; an upmarket product would mean developing capabilities in new kinds of materials.

There’s no obvious reason why Twsbi would ignore their innate strengths to focus on a market that is entirely new to them, designing something totally from scratch and using unfamiliar production materials. So it’s no surprise that the company has decided to pursue growth than expansion. The products on the radar for 2015/16 are not upmarket, gold-nibbed pens but ones that play to – even enhance – their strengths: the $30 piston-filling Eco (which may be released next month, according to Brian Anderson) and the Vac Mini. Alongside these releases are increases in their availability (check out the growing list of retailers) around the world.

Many business managers (particularly in small business) find some measure of security in spreading the business over several spaces in the market, hoping that this breadth can ensure longevity. I find this attitude understandable – a manager might feel like they don’t have any control of the market and determine that the best way to survive is diversifying their risk – but the attitude is also wrong. Diversification prevents a business from having control of a space; managers are sometimes spread too thin to even achieve a deep understanding of the spaces.

Both Goulet and Twsbi are rare examples of SMEs that recognise their core specialty – their competitive advantage – and are explicitly focussed on building the business around that advantage. They know their strengths and stick to them, which has enabled them to dominate the space that they are in, and find success. It’s what we should all be doing.