Apple just launched the new iPhone 17 and millions of people around the world will pay £1,000+ to have one. Why? It's not because Apple's a 'premium brand', it's because there's no acceptable alternative for these consumers.
As investor Sir Chris Hohn puts it, pricing power comes down to 'substitution risk'. How easy or hard it is for customers to accept an alternative? This dynamic explains why Apple's profit from the iPhone far outstrips its handset market share.
Today, with inflation at home and tariffs abroad, most brands are asking: "How can we increase prices?" But the better question is: "How can we decrease substitution risk?" This isn't wordplay. One's a question of tactics, the other's a question of strategy – and here are some thoughts on an answer.
First to mind, first to find
One way to decrease substitution risk is increasing your brand's mental and physical presence at the expense of alternatives that consumers would otherwise consider. This means ensuring your brand comes to mind most easily when people think of the category, minimizing the chances of rivals getting a look in.
McCain's 'Real families' campaign shows the efficacy of this approach. Achieving disproportionate share of voice in media combined with emotional storytelling in advertising, the campaign reduced price elasticity by 47%, increased consideration by 37% and generated £79m incremental gross profits.
But 'first to mind' alone isn't enough. Making your brand hard to substitute also means being 'first to find'; dominating search results and shelf space, pushing competitors to the periphery. Take Coca-Cola, a brand with an incredible global distribution strategy through its network of grocery, restaurant and convenience store partnerships. Its physical availability at any store or dining experience reinforces mental availability; when your brand is easiest to buy, consumers are less likely to explore their options.
The goal is squeezing out acceptable alternatives until your brand becomes consumers' instinctive and only choice.
Matt Boffey
Substance over style
Mental and physical availability isn't always enough on its own, especially in categories with longer sales cycles or more considered purchases. In these situations, substitution risk can be further reduced by demonstrating superiority over competitors.
Superiority can be real or perceived, tangible or intangible. Fever Tree demonstrates tangible superiority through ingredient quality and has 40% UK market share at significantly higher prices than Schweppes. Tony's Chocolonely is a brand that is seeking to balance both with a heritage of intangible superiority through its commitment to fairness and supply chain ethics and an increasing focus on the tangible superiority through its product.
Whilst both use these dimensions of superiority to reduce substitution risk and increase pricing power, what's crucial is identifying which claims will be most compelling to your target audience.
When Real Advantage Becomes Perceived Value
Many brands start with real superiority but end up relying on perceived superiority. Internally, it's tempting to compromise quality for profit – think consumer concerns when Kraft's 2010 acquisition of Cadbury sparked fears about recipe changes.
Externally, competitors catch up, turning yesterday's edge into today's cost of entry. Chinese manufacturers now match Tesla on tech, range and design, forcing Elon Musk to make price cuts as brands like BYD become acceptable alternatives.
As this shows, consumers aren't fools. People are better equipped than ever to separate style from substance, especially younger consumers. Research shows more than half of 13–39-year-olds in the UK would buy 'dupes' even if they could afford originals, suggesting a significant shift in how brand equity translates to pricing power.
But brands can fight back. Lululemon invited direct comparison through an amnesty program – swap your dupe leggings for the real thing – believing that experiencing their superior quality would reduce the adequacy of knock-offs as substitutes.
If you can't identify, you must invent
Substitution risk can vary by category maturity – it's often highest in emerging sectors where no brand dominates share of mind, switching costs are low, and consumers are experimental. Whilst market leaders in established categories should benefit from lower substitution risk, minimising it further still requires compelling claims.
Yet many marketers pay little attention to functional benefits and the supporting reasons to believe that make superiority credible. There's a reason why Guinness reminds people it's been over 260 years in the making. Who brews a better stout than those who've been perfecting it since 1759? So why should you be tempted to try anything else?
Where real superiority doesn't exist, marketers must influence the business to develop strategic innovations that make alternatives less acceptable. This means focusing on big, impactful projects making genuine differences rather than managing small, less impactful initiatives.
The imperative is clear: if you can't identify real superiority then you'll need to create it. Otherwise, you're just asking consumers to pay more for the same thing, perhaps with a packaging facelift, and hoping they'll say "yes".
Matt Boffey
The difference lies in design codes that signal genuine superiority. When design codes are authentic – connected to genuine difference rather than surface styling – they become powerful tools for reducing substitution risk: communicating dimensions of superiority quickly and easily through visual, verbal, and experiential signals.
Take Nespresso's Master Origins range, which communicates coffee provenance through geographically inspired packaging – turning inferred superiority of place into immediate visual recognition.
While some superiority is constructed through perception, brands relying purely on image face increasing vulnerability as information access improves and consumers become more discerning.
The Buffett test
Reframing premiumisation from price increases to substitution risk forces brands to ask the most important questions:
- Are we first to mind and first to find?
- Do we have real superiority or are we living on perceptions?
- What dimensions of superiority matter most to our audiences?
- How do we communicate it quickly and easily everywhere we show up?
Most brands will keep asking “How can we increase prices?” But the brands that thrive will ask “How can we decrease substitution risk?” As Warren Buffett puts it, pricing power is the ultimate test of business quality: “If you've got the power to raise prices without losing business to a competitor, you've got a very good business.” The brands that systematically reduce substitution risk pass this test; those that don't will find price-led growth remains a dream.
Authored by Matt Boffey, Chief Strategy Officer UK & Europe, Design Bridge and Partners
