Trading Up

Trading Up

          
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Trading Up

New Luxury Goods
Consumer & Retail, Marketing & Sales
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    In This Article
    • In this excerpted book, BCG documents a powerful dynamic in purchasing patterns that shatters conceptions about luxury brands.
    • The authors draw on more than 20 years of BCG’s consumer-insight research and seven case studies of New Luxury successes.
    • “Accessible superpremium” products are offered at a considerable premium over conventional offerings—but are still relatively low-ticket items.
    • Other offerings in this category extend established “Old Luxury” brands—once purchased by only the rich—with affordable products.
    • “Masstige” goods occupy a sweet spot between “mass and class,” commanding a price premium that is affordable to most consumers.
     

    Trading Up to New Luxury: An Overview

    America’s middle-market consumers are trading up.

    They are willing, even eager, to pay a premium price for remarkable kinds of goods that we call New Luxury—products and services that possess higher levels of quality, taste, and aspiration than other goods in the category but are not so expensive as to be out of reach.

    Consider Jake, a thirty-four-year-old construction worker earning about $50,000 a year, whose passion is golf. It took Jake a year to save enough money to buy a complete set of Callaway golf clubs—$3,000 worth of premium titanium-faced drivers, putters, and wedges—although he could have bought a decent set from a conventional producer for under $1,000. During the eight-month golf season in Chicago, Jake works the 6 a.m. shift so he can be on the course by 2 p.m.; he plays eighteen holes nearly every weekday after work and—again, believe it or not—twice on Saturday and twice more on Sunday. He is a three-index golfer, which means he is in the top 1 percent of all recreational golfers in terms of skill.

    We played a round of golf 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 the 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.” After the round (during which he did, in fact, kick our butts), Jake carefully placed his clubs in his pickup truck and said, “Thank you, Mr. Callaway, for another fine day.” In 1989, Callaway Golf was not a top-ten golf equipment supplier. Within three years of the introduction of the Big Bertha driver in 1990, Callaway soared to number one in the world.

    Like Jake, so many middle-market consumers want to trade up, and so many can now afford to, that New Luxury goods have flouted the conventional wisdom that says, “The higher the price, the lower the volume.” They sell at much higher prices than conventional goods and in much higher volumes than traditional luxury goods and, as a result, have soared into previously uncharted territory high above the familiar price-volume demand curve. In category after category of consumer goods and services, New Luxury winners have emerged, traditional leaders have been dethroned, and the entire category has been transformed. The phenomenon forces us to think in new ways about the relationship between consumer needs and consumer goods, and it offers a huge opportunity for business leaders to pursue their own aspirations and realize growth and profit as well. America is trading up, and it’s good for both business and society.

    The trading-up phenomenon is happening in scores of categories of goods and services, at prices ranging from just a few dollars to tens of thousands. It involves consumers who earn $50,000 a year and those who earn $200,000. Single moms do it, retired couples do it, working singles, families with kids, and even their pets do it. We have interviewed hundreds of middle-market consumers, observed hundreds more in their homes and workplaces, and conducted a survey of more than 2,300 people earning $50,000 and above. Ninety-six percent of them say they will pay a premium for at least one type of product. With 48 million households in the United States possessing incomes of $50,000 or more, and an average household size of 2.6 people, that’s nearly 125 million Americans with the means and the desire to trade up.

    Perhaps the most startling traders up we talked with were a group of consumers ecstatic about a product category that most people would like to forget—a washer-dryer combination from Whirlpool called Duet. The pair sells for more than $2,000, compared to about $600 for a conventional washer-dryer combination. Believe it or not, consumers made the following comments about these European-styled front-loading machines: “I love them.” “They are part of my family.” “They are like our little mechanical buddies—they have personality.” We are not making this up, and these people are not paid spokespeople or company employees. These are both women and men, with a range of demographic characteristics, who told us, again and again, that Duet makes them feel happy, like a better person, less stressed, prouder of their children, loved and appreciated, and accomplished. In our fifty combined years of listening to consumers, we have never heard more heartfelt expressions of emotion about a product that even industry insiders think of as mundane and unworthy of much attention. Five years ago, the Whirlpool brand managers, in their wildest dreams, had not imagined there could be that much unit volume for a washer-dryer at that price. Even today, they are astonished by their own success—and are struggling to build enough machines to keep up with consumer demand.

    Not all traders up are driven by feelings of happiness and accomplishment; many trade up to manage feelings of stress and difficulty. Frances, a divorced art director earning more than $100,000 a year, had been dating a guy for three years. On the eve of her fiftieth birthday, he told her he was leaving her for a thirty-year-old woman and they were going to start a family. “It sounds like a bad novel,” Frances told us. “I was unhappy. During that time, I bought a lot of jewelry, not only because it was beautiful and I loved it, but because I knew there wasn’t anybody who was going to buy it for me.” She realized what she was doing, and she didn’t jeopardize her financial well-being to do it. “At that particular time,” she said, “I just felt like I needed to give myself a happy pill.” With more women working in the United States, divorce rates on the rise, people marrying later, and more singles choosing to stay that way, there are a lot of consumers—men and women—looking for an emotional lift in the form of a New Luxury purchase.

    Trading up spans so many categories and appeals to such a broad range of consumers that it has come to represent a major and growing segment of the economy. In twenty-three categories of consumer products and services worth $2 trillion in annual sales, New Luxury already accounts for 20 percent of the total, or about $400 billion per year—and it’s growing 10 to 15 percent annually. It is about the same size in Europe and growing at a similar rate. And the demand is highly elastic because it can be created in categories that have never had a premium offering before and because even a category that has been transformed by a New Luxury product can be traded up again. We expect New Luxury to reach $2 trillion globally by the end of the decade.

    Excerpted from Trading Up: Why Consumers Want New Luxury Goods—and How Companies Create Them by Michael J. Silverstein and Neil Fiske by arrangement with Portfolio, a member of Penguin Group (USA), Inc., Copyright © The Boston Consulting Group, revised edition 2005.
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