“Trading Up” by Michael J. Silverstein and Neil Fiske

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This is a book about the shift in consumer purchase behavior towards either really nice, luxury goods or cheap alternatives in the areas the individual consumer considers expendable. For example, someone might buy cheap underwear in order to save up enough to buy that set of premium golf clubs. Although Trading Up was written in 2003 and revised in 2005, this phenomenon is in full-swing and evident at any retail store.

They also go through great lengths to describe the reasons a consumer would strive for what they call a New Luxury good. Namely, New Luxury goods have significant emotional appeal instead of Old Luxury’s appeal to status anxiety. These emotional spaces of appeal can take several angles, such as “Taking care of me”, “Connecting with others”, “Questing and exploration”, and “Individual style”. All four emotional spaces are profiled in the book and read like a marketing primer for the Internet Age.

The authors detail the evolution of the use of expendable income through case histories of different industries. I hadn’t known that wine was considered a cheap drunkard’s drink before premium alternatives came along that appealed to consumer’s emotional needs. Other surprises are hidden throughout this book, and in a strange way thinking about consumer behavior has given a lot of products and advertising copy I see in the aisles of grocery stores a fresh perspective.

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Highlights
When we first started talking about trading up, some observers dismissed it as an anomaly, a short-lived trend that came about as a result of an unprecedented confluence of factors, including a strong economy, remarkable consumer confidence, and a buildup of home equity. Our continuing research shows, however, that consumer buying of New Luxury goods is not much affected by economic conditions, and that the performance of companies providing New Luxury goods remains strong even in a downturn.

Trading down is when consumers choose the low-cost alternative in product categories of little importance to them, and it is an essential part of the larger phenomenon. Without the availability of low-cost alternatives and commodity goods in a very wide range of categories, many consumers would be unable to afford the New Luxury goods they want to but in the small number of categories that are most meaningful to them.

Now that most consumers can afford to buy the goods that fulfill their basic survival needs and still have cash available, they will buy products and services that are emotionally meaningful to them.

It’s not surprising that trading up should be such a durable phenomenon, because, in fact, it is nothing new. Around the world, people have been trading up—seeking to enrich their lives and engage their senses and emotions through wonderful goods—for centuries. What’s different about trading up today is its availability to a much larger percentage of the population, and there are vastly more premium goods and services to trade up to.

We played a round of gold with Jake at a public course, during which he described in detail the technical differences and performance benefits of his Great Big Bertha clubs. “But the real reason I bought them,” he told us at last, “is that they make me feel rich. You can run the biggest company in the world and be one of the richest guys in the world, but you can’t buy any clubs better than these.” Then, looking at us with a hint of a smile, Jake said, “When I kick your butt on this course, I feel good. I feel equal. I may make a lot less money than you do, but I think I have a better life.”

Most important, New Luxury goods are always based on emotions, and consumers have a much stronger emotional engagement with them than with other goods.

By contrast, very expensive Old Luxury goods—such as Chanel handbags and Rolls-Royce cars—are based primarily on status, class, and exclusivity rather than on genuine, personal emotional engagement.

Emotional engagement is essential, but not sufficient, to qualify a product as New Luxury; it must connect with the consumer on all three levels of a “ladder of benefits.” First, it must have technical differences in design, technology, or both. Subsumed within this technical level is an assumption of quality—that the product will be free from defects and perform as promised. Second, those technical differences must contribute to superior functional performance. It’s not enough to incorporate “improvements” that don’t actually improve anything but are intended only to make the product look different or appear to be changed. (American carmakers played that game for years.) Finally, the technical and functional benefits must combine—along with other factors, sch as brand values and company ethos—to engage the consumer emotionally. Most consumers make one dominant emotional connection with a product, but there are usually others involved as well.

As consumers buy more selectively, trading up and trading down, they increasingly ignore the conventional, midprice product that fails to deliver the ladder of benefits. Why bother with a product that offers neither a price advantage nor a functional or emotional benefit? Companies that offer such products are in grave danger of “death in the middle”—they will be unable to match the price of low-cost products or the emotional engagement of New Luxury goods. They will lose sales, profitability, market share, and consumer interest. To survive, they must lower prices, revitalize, and reposition their products, or exit the market.

A less obvious contributor to consumer wealth is the savings that have been passed on to them by large discount retailers.

Middle-market consumers are also more aware of their emotional states and are more willing to acknowledge their needs, talk about them, and try to respond to them. We all receive countless messages every day—especially from media influences and celebrity endorsers—urging us to reach for our dreams, fulfill our emotional needs, go for the gusto, self-actualize, take care of ourselves, and feel good about who we are. What’s more, these messages are often intertwined with, or linked to, New Luxury goods. The lifestyle gurus endorse products, the celebrities and influencers display them, and the specialty retailers make them available everywhere.

These factors have transformed the profile of the “average” middle-market American consumer from an unassuming and unsophisticated person of modest means and limited influence into a sophisticated and discerning consumer with high aspirations and substantial buying power and clout.

Mass merchandisers have also played an important role in the spread of New Luxury goods, stocking more and more premium items on their shelves. Costco, for example, now stocks a larger selection and sells a larger volume of premium wine than any other retailer. Costco stores sell more first-growth wines from the Bordeaux region of France than any other retailer, including wine specialty chains.

New Luxury creators have also benefited from the globalization of business and trade. The easing of international trade barriers, the improving capabilities of global supply-chain-service providers, and the reduced costs of international shipping have enabled companies of almost every size to take advantage of foreign labor markets and put together and manage complex global networks for sourcing, manufacturing, assembling, and distributing their goods.

New Luxury consumers are defined by their highly selective buying behavior. They carefully and deliberately trade up to premium goods in specific categories while paying less or trading down in many, or most, others.

Because houses are bigger and more valuable than ever, it is no wonder that a lot of money taken out gets poured right back into them in the form of improvements and new fixtures and appliances. Besides, the home is the most emotionally rich possession to most consumers, and money spent there is rarely considered to be wasted. In 2001, Americans spent some $160 billion in 1970. (Home Depot grew from $1.6 billion in sales in 1985 to $54 billion in sales in 2001—equal to more than a third of our national spending on home improvement.)

“When things become important to you, they become necessities.”

New Luxury consumers also like to learn about specific products and the companies that make them. That’s why so many New Luxury brands have a narrative associated with them. Every American Girl doll is created with a complete life story from a specific era of history, told in beautifully produced full-color books. American Flatbread frozen pizza tells how its founder got the idea for his pizza and puts the story right on the back of the box.

These two women have played a key role in the trading-up phenomenon. Oprah has said it’s okay to trade up. Martha provides the how-to.

Thanks to incessant media exposure, we know these celebrities live, the activities they engage in, they goods they use, and the products they endorse. We know we can’t be them, and we don’t really want to be. But we will take cues from them and sometimes associate ourselves with goods and services they find worthwhile. If we use the clubs they use or wear the clothes they do, a little bit of them rubs off on us.

So, New Luxury goods bring a measure of relief and comfort into a world that can be harsh and uncertain. Americans have become far more aware of the frightening possibilities that surround us—we live with heightened fears of terrorism, war, and other conflict at home and abroad. We also live with a persistent concern about the national and global economy. As we learned from our survey, about 40 percent of the respondents are “worried about the future.” But even in the face of uncertainty—especially in the face of uncertainty—Americans don’t want to spend their money on bland, emotionally empty goods. They want to spend on items that bring emotional engagement, from spirits to nice sheets. Why not? As Frances puts it, “There’s a part of me that feels like, ‘Spend some money. Have some fun! You’re going to die tomorrow.'”

When people are hurting, especially after something as intense as a romantic breakup, goods bring solace, comfort, reward, revenge, and some measure of self-esteem.

New Luxury consumers, therefore, are complex creatures. They have wealth and sophistication. They are driven by fears but have high aspirations. They want it all, but they are often exhausted by trying to get it. They spend liberally on themselves, but they also believe they should do right for the world. They rocket, they trade up, and they trade down. They follow fashion and scoff at it. They buy for individual style and a little bit for status. They are highly influenced by their friends and cultural figures, but they have strong tastes of their own. They will try almost anything, but they give their loyalty sparingly. They don’t believe in debt, but they don’t let money stand in the way of buying what they want. They love objects, but they don’t believe in conspicuous consumption. New Luxury consumers need a lot of understanding. When they get it, they are not only appreciative, they are also likely to open up their pocketbooks and spend. They are a growing force of consumers—one to be reckoned with.

Outsider thinking is important because it enables the entrepreneur to wriggle free of that constricting assumption of the industry insider: the conventional price-volume demand curve. The industry insider is so used to the standard formula of “how many units” can be sold at “what price point” that it becomes hard for him to imagine that a premium product can move off the standard demand curve and sell at significantly higher volumes and higher margins. Outsider thinking also enables the entrepreneur to import ideas and practices from other industries and cultures and apply them to every aspect of strategy—including product development, pricing, consumer profiles, organization, and marketing.

In addition to their outsider thinking skills, New Luxury leaders have a facility for “patterning.” They are keen observes who are able to analyze the elements at work in an industry and see those that are missing as well. They make connections between elements that have not been made before and then create a new frame of reference for themselves and the category. Wexner told us, “I have to see a lot of things and then somehow I just make conclusions. If I see enough stuff, get out and around, I ca put it into trends and put things together in funny ways.”

(JetBlue, like Trader Joe’s, seems anomalous because of its discount price policy, but it qualifies as New Luxury because the company achieves high margins at high volumes, and it delivers the ladder of benefits, especially the emotional engagement of its customers.)

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 than Old Luxury goods, but their accessibility is more limited than conventional meddle-market products.

Old Luxury goods are priced to ensure that only the top-earning 1 to 2 percent of consumers can afford them and to provide a large enough margin so their makers can be profitable at very low unit volumes. New Luxury goods are always priced at a premium to conventional middle-market products—often as much as a tenfold premium—but are still priced within the financial reach of 40 percent of American households and not out of the question for 60 percent of them, those making $33,000 and up annually.

This artisanal quality allows for variation in the look and feel of the goods.

The artisanal nature of New Luxury goods allows emotionally driven spenders to better express their individuality and personal style.

The cost of shipping and distribution from overseas markets to the United States has also fallen. The real cost of Asia-to-United States ocean freight declined 28 percent from 1993 to 2001, and the real rate of United States-to-Asia shipping declined even more dramatically—by 54 percent. This makes it cost-effective to ship raw materials, components, and finished goods from around the world.

The home reflects not only our sense of economic well-being but also our attitudes about living, raising a family, social interaction, personal style and taste, and accomplishment. Among the categories we have studied, the home ranks at the top of the trading-up list by a substantial margin—Americans distort their discretionary spending toward their home more than any other category. “The American Dream” is not only alive and well as an aspiration, it has become the emblem of our identity, the physical expression of our heart and soul.

As a result, Panera creates apostles. Julia, for example, is more than willing to spend $7 on lunch because, as she says, “It’s worth it. True, sometimes I think ‘Woah! That lunch cost a lot more than four dollars,’ but then I remind myself that I’m not getting four-dollar food!” To create apostles, Panera—like New Luxury players in every category—has created a detailed story for its consumers and for its store associates. They are able to articulate what makes Panera special and unique, talk about why it was founded and its mission (beyond profitability), and what the individual store manager (known as an owner) is particularly passionate about. Sometimes the story also defines an oppositional positioning—exactly what the restaurant is not and why. All successful fast casual chains have a set of creative building blocks to tell their story, including print materials, Web sites, activities, and events; these blocks can be used in a variety of ways, but they deliver consistent messages.

The world values specialists, not generalists.

But trading up also poses a threat to many businesses. The entry of New Luxury goods generally leads to polarization in its category. Consumers gravitate toward the premium New Luxury goods if that category is important to them. If it isn’t, they trade down to low-costs goods. That can often lead to death in the middle for those brands and products that offer no specific reason to buy: a significant price and cost advantage, a genuine technical or functional difference, or an emotional benefit.

Managers of conventional businesses that are threatened with death in the middle often protest, “We can’t create a premium product in our category. There’s no volume at the high end!” Or, “Our product is a commodity—there are no real differences. We can’t create emotionally satisfying goods.” But there are emotional issues lurking in every product category, and where there is emotion and a product difference, there can be volume and profits.

Consumers are not able to envision the final product; they tend to be too skeptical or overly enthusiastic. In the early stages of development of her American Girl dolls, Pleasant Rowland hired a marketing manager who suggested that she test the concept with a focus group of mothers. The focus group leader orally described the concept to the mothers, and they immediately and unanimously hated it. Then the leader showed the group a prototype doll along with a sample book and accessories, and the mothers changed their minds completely. it was a lesson that Rowland did not forget: “Success isn’t in the concept,” she said. “It’s in the execution.”

Ask consumers what they want, and they will stare blankly at you. Engage with 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. There is an important role in connection and understanding and involving the customer, but it’s a very different role than has historically been played in large packaged-goods companies.

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