Why People Pay Premium Prices for Luxury Items
Emotional engagement can drive middle-market consumers to pay premium prices for luxury items while they cut back on their spending for things they don't care as much about. In Trading Up, Michael Silverstein and Neil Fiske, two consultants from The Boston Consulting Group who have studied this phenomenon, explain that an emotional connection is just one of several parts to the New Luxury equation.
The authors write that New Luxury products and services are those that possess higher levels of quality, taste and aspiration than other goods in their category, but they are not priced so high that they are out of reach for middle-market consumers. No longer do higher prices mean that less products or services are sold. Instead, these consumers are eager to pay a premium price for remarkable products. Trading up, according to the authors, has allowed companies to sell their products at higher prices than conventional goods in much higher volumes than traditional luxury goods. These products cross many categories of goods and services, and have changed the ways businesses pursue growth and profit.
Dolls, Dryers and Drivers
Whirlpool capitalizes on the willingness of middle-market consumers to spend more on luxury items that make them feel good about themselves by offering a European-styled, front-loading washer-dryer combination called Duet for $2,000 - more than three times the price of a conventional washer-dryer combo. Callaway Golf has become the number one golf equipment supplier in the world in just three years after many middle-market consumers have chosen to spend three times as much on Big Bertha drivers for the sheer enjoyment of playing with the best. Victoria's Secret benefits from consumers choosing to pay twice as much for fashionable underwear.
The authors explain that there are three rungs on the "ladder of benefits" that make a product or service a New Luxury item. First, it must have technical differences in design, technology, or both. Second, its technical differences must contribute to superior functional performance. Finally, the technical and functional benefits must combine to engage the consumer emotionally. The authors write that a New Luxury brand must solidly deliver the ladder of benefits to succeed. Companies the authors explore to describe what it takes to become a New Luxury brand include Starbucks coffee, Kendall-Jackson wines, American Girl dolls, and BMW automobiles.
The authors analyzed more than 30 categories of consumer goods and services, researched economic data, and surveyed 2,300 consumers about their buying habits and attitudes. Their results brought them to the conclusion that there are fundamental forces that fit into a powerful, long-lasting, and resilient social and business pattern they call "trading up."
They explain that New Luxury goods cannot be created with traditional methods. Instead, New Luxury leaders across all categories follow these eight practices:
- Never underestimate customers.
- Shatter the price-volume demand curve.
- Create a ladder of genuine benefits.
- Escalate innovation, elevate quality, and deliver a flawless experience.
- Extend the price range and positioning of the brand.
- Customize value chains to deliver on the ladder of benefits.
- Use influence marketing and seed success through brand apostles.
- Continually attack the category like an outsider.
Why We Like This Book
Along with clear descriptions and insights into the phenomenon of New Luxury goods and services, Trading Up offers concise explanations and descriptions of the strategies the leaders who have embraced this category of products have used to make them succeed. The authors' research and statistics into the buying habits of the middle-market consumer provide provocative ideas all businesses should explore.