It’s been about 15 years now, since sociologists and marketers were amazed to discover a new phenomenon. BMW is parked in front of our discount stores. Why would somebody who pays fifty or sixty thousand pounds for a car want to save 50 cents on a liter of milk? The answer was, of course, that they were ‘trading up.’ An explanation of this can be found in this excellent book. Trading up is what consumers are prepared to pay a premium price for certain products that they think bring more luxury. It can be in many different areas, from Belvedere vodka or Boston Beer which costs 50% more than standard beers. It can be in things like pub food or in the doll industry, with American Girl.
Luxury, strategy, management, behavioral economics, marketing, strategic management, corporate strategy, product innovation, market diversification.
Silverstein and Fiske begin their book with an excellent example of Jake, a thirty-four year old construction worker who earns $50,000 a year, and yet he is willing to pay $3000 for a premium titan-faced set of golf clubs. Jake saves for most of the year and spends very little on most things. However, for the exception of golf, which is his passion, he plays at least once a day. He is prepared to pay a premium price.
Going through a range of different products and services, the authors have found that America’s middle market consumers are willing to trade up, if the conditions are right. New luxury goods, they say, are based on emotions, and the consumers who buy them have much stronger emotional engagement than with other goods. This can be for very expensive items, such as a set of golf clubs or a washing machine. It can also be for relatively low cost items, such as a beer or a glass of vodka.
The book gives a whole host of examples of different areas in which consumers are willing to trade up. Each chapter deals with a different type of product or service, and one good example of new products or brands that have broken into that market, and convinced consumers to pay a premium price for their luxury goods or services. Each chapter is an excellent read and is packed with figures and analysis about how that product or service has succeeded. They give an excellent explanation of how kitchens have become people’s lives and how much people are willing to spend on them. They also explain why people are willing to spend more on themselves these days, and why they are willing to trade up. In particular, demographic issues have had a major impact. Firstly, people are dating for much longer before they get married, so they want to create an image of themselves that they can project to the world. Secondly, divorces are much more common, so that once people become single again, they feel as if they need to buy products or services that match the image that they want to give out.
Quoting a character from Sex and the City, they state:
“Breakups: bad for the heart, good for the economy.”
All of the examples given in the book deal with companies that are US-based, with some notable exceptions, such as BMW. However, the final two chapters look at opportunities for growth, and for once, it is quite refreshing to see that Europe is considered to be an area where growth in premium products can be developed. France, in particular, is cited as an area where there is a huge potential for companies to develop new products and services, and charge premium prices. The book also gives some interesting examples of products and services that have the potential to transform their categories into premium products. We have all got used to the five-dollar Starbucks coffee, but tea is cited as one of the products that could be traded up. Already, there is some evidence of the tea category beginning to polarize, with specialist teas coming onto the market.
Similarly, there is room for improvement in the healthcare industry, and with the aging of the populations in the developed world, this would seem to be an area that has the potential for great success in premium products. The authors cite one example, personal physicians’ healthcare, which charges a $4000 annual premium, because the doctors involved limit the number of patients that they deal with, and are thus able to give a much better service.
A final example comes from the university sector, and this is a wonderful case of looking at things differently. Boston University found that incoming students were unhappy with the size of their dormitories, having been used to much larger rooms at home. The university therefore developed new dormitories, offering single rooms with private baths, Internet access, and premium services. It has to be said, however, that when people are complaining about the costs of universities today, this is part of the problem.
Trading up will give an excellent insight into many different companies, and how they have looked at new markets. These are, to some extent, the typical ‘blue oceans’ that have been set out in the past by other authors. They give a good strategic analysis of a variety of different companies and, despite the fact that they are conscious that all types of trading up cannot last forever, eventually competitors, seeing higher profits, will be drawn into that market.
Interesting quotes from the book:
New Luxury goods are always based on emotions, and consumers have a much stronger emotional engagement with them than with other goods. Even relatively low-ticket items, such as premium vodkas, have a well-defined emotional appeal for their consumers.
Empty nesters are important traders up.
Divorced women said they would trade up in as many as thirty categories, far more than any other consumer profile.
There are about 112 million households in America today; almost 28 million of them have annual income of $75,000 or more, and 16 million of those take in more than $100,000.
In Japan, there are about 5 million young, single, working women who live at home with their parents. They spend up to 10 percent of their annual salary on fashion items, and they are the largest spending segment of Japanese society. As a result, they are powerful tastemakers: they have helped make Louis Vuitton the most successful luxury brand in Japan.
As Carrie Bradshaw, the lead character of Sex and the City, puts it, ‘Breakups: bad for the heart, good for the economy.’
Old Luxury is about exclusivity. People who buy a Rolls-Royce do not wish to see a dozen other Rolls-Royce cars in the parking lot at Wal-Mart. New Luxury goods are far more accessible…
…traditional market research will often miss the emotional underpinnings of New Luxury success, and conventional product testing may undermine the linkages between the emotional, functional, and technical benefit layers.
Boston Beer sells its superpremium product, Samuel Adams Utopias, for $100 a bottle. The company makes only 6,000 bottles per year and, according to founder Jim Koch, sells out the entire stock in a week. The lesson of Utopias, says Koch, is that ‘there is always a higher end.’
The Cheesecake Factory is one of the fastest growing of the casual sit-down restaurants- a $500 million chain with a 27 percent compound annual growth rate from 1996 to 2001.
’No item makes the menu until I certify it offers comeback quality,’ says the company founder David Overton. Gerald Deitchle, Cheesecake’s CFO, says ‘Sometimes the numbers don’t explain everything. The numbers are not the business – they are the symbols of the business.’
In the last ten years, global share of the old world (Western European) producers has dropped from 79 percent to 67 percent. The outsides are winning because they have lower costs, a greater investment in advanced technology, and more-sophisticated marketing methods and pricing strategies.
1. Never underestimate the customer, 2. Shatter the price-volume demand curve.
Beer was one of the first American industries revolutionized by low-cost, high-speed, high-throughput methods manufacture and distribution in the late nineteenth century.
In addition, the brewers discovered image advertising and mass promotion that squeezed the weaker producers out of market. As a result, tremendous consolidation has taken place in the industry. Over the past one hundred years, a business with two thousand independent local producers has been consolidated to three national brewers with a combined 80 percent share.
‘We built Sam Adams through basic street selling, because we knew that bartenders would be one of the influences in the decision-making process.’
Within six weeks of its first shipments, Samuel Adams Boston Lager was named ‘Best Beer in America’ by 5,000 judges at the largest beer festival in the United States.
Time rated it the best beer of the decade.
In 1989, Callaway had sales of $10 million and did not appear on the list of the top ten golf-club manufacturers. By 1992, Callaway sales had leaped to $100 million, and it was at the top of the list.
According to Golf magazine, the average avid golfer spends $4,356 on golf each year.
After its dramatic rise to the top, Callaway Golf peaked in 1997, and the company’s growth slowed considerably. During the years 1992 through 1997, sales grew at a 15 percent compound annual growth rate (CAGR); from 1998 to 2001, sales grew at just 3 percent CAGR.
A return from the dead is unlikely in New Luxury. BMW, Mercedes-Benz, and Lexus have already so transformed the market- making their cars more affordable at the low end and more aspirational at the high end- that Cadillac may not be able to escape death in the middle.
Two examples of New Luxury goods that have the potential to transform their categories are premium tea and high-performance athletic clothing.
Although the number of cups of tea consumed per capita in the United States has been decreasing for the past decade, dollar sales of tea are on the rise- up from less than $2 billion in 1990 to more than $5 billion in 2002. And consumers with household incomes of $75,000 or more are the major tea purchasers.
In France, for example, consumers’ exposure to advertising has increased by 60 percent over the last fifteen years. In Germany, exposure to TV advertising has increased by 85 percent over the last six years.
French seniors are already noted traders up. People fifty years of age and older account for 33 percent of the population in France. They earn 45 percent of net domestic income and hold 50 percent of the net financial assets. They represent a market for goods and services estimated to be about €150 billion in size.
Americans never liked to settle back, give up, and trade down unless they are absolutely forced to by world events or personal vicissitudes. Even when times are rough, they tell us, they continue to hold on to one or two New Luxury items they ‘just can’t live without.’
It takes committed leaders and bold execution to seize the trading-up opportunity.
Ask consumers what they want, and they will stare blankly at you. Engage them in the category and ask for improvements, and they will work with you. Most of the innovations in the thirty categories we have studied would have been killed by traditional customer research.
Other Book Reviews
Sumit4all: “After reading Trading Up for two weeks. And what a captivating read it was! It was difficult to put it down once I started it. The book was very well researched and a lot of data has been presented in the book to justify the points made.”
Publishers Weekly: “In Bobos in Paradise, David Brooks traced the cultural forces behind the rise of what he called the bohemian bourgeois class. Now Silverstein and Fiske take a close look at its buying patterns.”
Related Blog Articles
The Economist: “Americans are trading down. If they still have jobs (as 91% of the workforce do), they are worried about losing them. Their homes are no longer cash machines and their investments are in a ditch.”
I have just finished my classes for the semester in Strategic Management. As I did my fifteen minute wrap up of the course, I announced some interesting news to my students. Just three weeks ago, Michael Porter’s company, the Monitor Group, had declared bankruptcy. It is a rare treat to subdue a group of enthusiastic business students but their stunned silence was fascinating to watch. Read more…
Many have written about the key components of business success. Theories build on approaches ranging from evaluating lessons learned to recognizing opportunities and having a willingness to take measured risks. Clearly such concepts can play an influential role. However, there are three key foundational imperatives for ensuring enduring success. Read more….
Theinnerwildkat: “Remember the Titans – the movie shows the beginnings of acceptance and teamwork that were beginning to take root during a very tough time in our history. As I thought about the this movie, I saw a lot of pertinent things to today in both acceptance and leadership.”