The Context

Spirit recently introduced a new premium tier of service that includes perks like snacks, drinks, Wi-Fi, and more.

• This is the same Spirit that became the face of a no frills, no perks, lowest price flying

Spirit brought the industry down with them (think: Basic Economy fares) and now they’re trying to rise up into a more “traditional” flying experience.

The airline’s push to go premium is in pursuit being more profitable.

JetBlue was planning to acquire Spirit, but that fell apart and the result is that Spirit needs to find new ways to restore profitability.

The Strategy of Premiumization

The idea of premiumization is pretty simple - sell better products for a higher price to less consumers.

• Why sell two seats at $100 if you can sell one for $200?

Customer acquisition is expensive and difficult. Acquiring fewer customers at an increased price can be a shortcut to higher revenue and profit.

Premiumization is not inflation. The strategy is to move customers into a higher quality product and raise revenue per purchase (or per customer).

• One of Starbucks’ goal in releasing premium seasonal beverages is to push consumers into a higher purchase than their normal routine (Cold Brew - $3.95 → Pumpkin Cream Cold Brew - $4.75)

This strategy comes with drawbacks as well.

To state the obvious, fewer customers that can afford the product means less available customers.

• This isn't a problem for Lamborghini, who sells exclusivity, but is for McDonalds, who sells to the masses.

As an extension to this, a company that relies on repeat purchases to drive customer lifetime value may see a drop off in long-term revenue when less initial customers are created.

How to “Premiumize”

Premiumization is best done as a brand extension rather than within a brand itself.

The reason for this is simple - it’s hard to associate a single brand with multiple value propositions.

• Walmart’s Great Value product line can’t be lowest cost and organic / unique / premium

As a brand, you have one shot to create an association.

What does someone think when they hear your brand?

The marketing, product line, and customer acquisition strategy have to reinforce a single association, not fragment across multiple.

This is why you see new brands created from existing parent companies to go after new market segments.

For example, Walmart introduced a premium product line called Bettergoods selling 300+ upscale items at a premium price.

Great Value is designed to deliver…value. Bettergoods is designed to be…better (and more expensive).

Customers self-select into the level of product they want, but both options exist under distinct brands with distinct value propositions.

Take the Volkswagen Group as another example. They own Volkswagen, Audi, Porsche, Lamborghini, and more.

Each brand hits a different consumer segment from affordable to luxury. Lamborghini shouldn’t come down market just as Volkswagen can’t go too far upmarket.

Spirit’s Positioning

The challenge for Spirit here is two-fold:

• They’ve built too strong of a brand around ultra-low cost

• They can’t introduce the service as a different product line

Spirit has a reputation and credibility problem trying to go into more premium offerings.

Today, their reputation works because customers understand and accept the trade off of service and price.

Moving into a more premium market either raises the bar for the customer expectations or sets that experience up to fail because a premium customer is delivered a value experience (other than the in-flight perks).

That said, I see two situations where this can work for Spirit:

• The same customers buy a better experience

• They are the only route serving two markets

I don’t see this as a customer acquisition play. If someone wasn’t going to pick Spirit before, few will choose them now.

A premium offering puts them up against the likes of Delta, United, and others.

Decades of brand equity says more customers than not will continue choosing the larger names.

This is why the premium offering has to be within the price range and value offering of the current flyers.

Further, there’s a much higher chance of success if Spirit is the only direct route between two destinations.

Given the choice between a Spirit premium nonstop and a Delta layover, they have a real shot of winning.

The Takeaway

Spirit is trying to contradict the heart of their value proposition by convincing value customers to go premium. It’s not impossible, but it will take time and persistence.