Trading Up

Americans are willing to pay more for prestige.

America's middle-market consumers are trading up to higher levels of quality and taste. The members of 47 million households that constitute the middle market (those earning $50,000 and above in annual income) are broadly educated and well-traveled as never before, and they have around $3.4 trillion of disposable income. 1 As a result, they are willing to pay premiums of 20 percent to 200 percent for the kinds of well-designed, well-engineered, and well-crafted goods—often possessing the artisanal touches of traditional luxury market goods—not before found in the mass middle market. Most important, even when they address basic necessities, such goods evoke and engage consumers' emotions while feeding their aspirations for a better life. We call these new-luxury goods. Unlike old-luxury goods, they can generate high volumes despite their relatively high prices.

Businesses offer a wide variety of new-luxury products and services—including automobiles; home furnishings; appliances; consumer electronics; shoes and other apparel; food; health, personal, and pet care; sports equipment; toys; and beer, wine, and spirits. Companies at the new-luxury forefront are achieving levels of profitability and growth beyond the reach of their conventional competitors.

It took me a long time to believe that this trend was real. Back in business school when we studied Starbucks I would think "it's just coffee". I was so naive (which is probably what I will say in a few years when I read these posts). But here is real takeaway from the article.

As consumers shop more selectively, the categories new-luxury goods occupy tend to polarize. Consumers tend to trade up to the premium product in categories that are important to them but trade down—buying a low-cost brand or private label, or even going without in categories that are less meaningful to them. Consequently, people's buying habits do not invariably correspond to their income level. They may shop at Costco but drive a Mercedes, or they may buy private-label dishwashing liquid but drink Sam Adams beer. Left in the cold are midpriced items that fail to distinguish themselves on any of the three rungs of a product's ladder of benefits. Companies unable to match the prices of low-cost products or promise the emotional engagement of new-luxury goods face what we call death in the middle. It may be a retailer like Sears, which the mass merchandisers and specialists in particular categories of goods are beating on price, or it may be a cosmetics and personal-care line like Max Factor, which does not deliver on the ladder of benefits or offer a cost advantage.

I think we will see many more routine products expand to offer a luxury version. After all, we have to keep up with the Joneses, maybe even one-up them.

Via A Penny For