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Tuesday, October 27, 2009

Shopping for Gratification; What happens when prestige meets the mass market? Trading Up explains why consumers are willing to pay more for "New Luxur USA, LLC

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Are you passionate about your washer and dryer? Passionate, that is, about their remarkable qualities, not because they have been shredding or baking your clothes. Do they give you a deep sense of satisfaction? If they do, they're probably a Whirlpool Duet Fabric Care System (known to the rest of us as a front-loading washer and dryer).

Duet owners are looking for more than simple washing and drying, according to authors Michael J. Silverstein and Neil Fiske, who say they seek emotional engagement with their possessions. Mere white goods fail to move Duet owners. They want technical excellence and functional superiority. The two-tone, Italian-styled Duet HT washer mercilessly attacks the common infectious bacterium -- the average microbe has a 99.999% chance of dying in the 150-degree waters that swirl around it. The appliance sells for $2,000, more than four times the average price of other Whirlpool (WHR) washer-dryer combos.

CALL IT "MASSTIGE." In its precision-engineered drums, Silverstein and Fiske have seen the future of the American consumer marketplace. In their new book, Trading Up: The New American Luxury (Portfolio, 300 pages, $26.95), they describe a new pattern emerging among American middle-market buyers -- a willingness, nay, even an eagerness, to pay a premium price for goods they describe as New Luxury.

If you've wondered why Panera (PNRA) shops pop up in our landscape while McDonald's struggles, this book offers a convincing answer: Consumers today will pay more -- a lot more -- for certain items that they find especially satisfying. How entrepreneurs created such goods -- things that provide "masstige," prestige for a mass market -- is the focus of Trading Up.

Silverstein, a senior vice-president at Boston Consulting Group (BCG), and Fiske, a former BCG vice-president and current president of Bath & Body Works, get their evidence from interviews with 2,300 adults boasting annual incomes of $50,000 or more, market studies, and interviews with entrepreneurs who have built huge businesses on customers who trade up.

"DEATH IN THE MIDDLE." The authors say people buy New Luxury items because of a "relatively small set of emotional drivers, both positive and negative." They describe four "emotional spaces" that influence consumption: Taking Care of Me, Connecting, Questing, and Individual Style.

Home furnishings are typically Taking Care of Me goods, while Connecting goods (food, liquor, jewelry) help buyers to impress a potential mate or show affection. Questing is about adventure -- traveling to exotic locales or sampling the latest new cuisine. Individual Style is about consumption as self-expression.

Silverstein and Fiske say consumers increasingly split their purchases between commodities and items they really care about. The authors convincingly predict companies that focus on selling conventional midprice goods -- things that are neither great values nor compelling -- will suffer "death in the middle."

If you want to emulate the success of New Luxury providers, the authors offer eight practices to follow:

-- Never underestimate the consumer

-- Shatter the demand curve -- recognize that true New Luxury goods can be sold at premium prices and generate large sales volume

-- Create a ladder of genuine benefits -- a New Luxury product must offer genuine technical, functional, and emotional advantages over conventional items

-- Escalate innovation, elevate quality, deliver a flawless experience

-- Expand the price range and positioning of the brand

-- Customize the value chain to deliver on the benefit ladder -- emphasize control of processes rather than ownership of all elements of production and delivery

-- Use influence marketing, seed your success through brand apostles

-- Continually attack the category like an outsider

MORE DISCRIMINATING. Increasing purchasing power, travel, and more serious attention to purchases have shaped the tastes of New Luxury consumers, the authors say. Trading Up explains how Victoria's Secret, Panera, American Girl, Pottery Barn, Callaway Golf (ELY), BMW, and others have established themselves as New Luxury providers, selling surprisingly large quantities of premium-price goods.

"There's an awareness of quality, maturing of taste, and growing sophistication of the middle and upper middle class," says Gordon Segal, founder of Crate & Barrel, a New Luxury retailer. He describes his goal as "the democratization of style and taste."

Americans have indeed become more sophisticated and discriminating over the past three decades. Truly improved design and willingness to pay more for it are big factors in many of Trading Up's New Luxury success stories.

-- Ely Callaway yearned to create a new type of golf club that's forgiving and helps amateurs drive the ball farther, and created the Callaway Big Bertha driver -- at more than double the price of the (former) industry leader's club.

-- Edward Phillips found a great vodka in a duty-free shop and then refined it, removing traces of amyl, propyl, and isopropyl alcohol -- Belvedere vodka is thus reborn as a New Luxury spirit.

-- Eiji Toyoda, chairman of Toyota (TM), challenged his company to apply its engineering expertise and superb quality control to create a luxury car, and when the ultra-reliable Lexus LS400 appeared, it started chewing into Cadillac's market share.

OUT OF THE BATCAVE? The authors make a cautionary tale of Cadillac's recent history, an Old Luxury make that lost its cachet, surpassed by New Luxury carmakers with superior design, quality, and emotional appeal: BMW, Lexus, Mercedes-Benz. Silverstein and Fiske doubt that current attempts to rejuvenate Cadillac will succeed. Alas, the styling of recent Cadillac cars suggests a conceptual detour through the Batcave.

Man does not live by Panera bread alone, and the authors seem to grasp this. Betsy, a 22-year-old interviewee, tells them, "You're putting yourself through all this stress so you can afford to be exposed to comfortable, nice, wonderful, luxurious things. If you don't indulge in any of those things, you can get a little burned-out and lose sight of what you are doing it for. But then that brings me to the question: Is it all worth it?" Good question, Betsy.

Named Works: Trading Up: The New American Luxury (Book)

Source Citation
Sullivan, Thomas D. "Shopping for Gratification; What happens when prestige meets the mass market? Trading Up explains why consumers are willing to pay more for 'New Luxury'." Business Week Online 3 Nov. 2003. Academic OneFile. Web. 27 Oct. 2009. .

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