Trading up
Seeking new luxuries: the consumer drive and corporate creation
Description
American middle-market consumers with incomes of $50,000 or more are increasingly willing to spend more on high-quality products, giving rise to the "New-Luxury" market segment.
In 2003, the U.S. saw around $400 billion in sales of these premium goods, with expectations of continued growth at a rate of 15% annually, potentially reaching $1 trillion by the decade's end. This trend challenges the traditional view that higher prices mean lower sales volumes, as new-luxury items are selling in large quantities despite their higher prices.
Companies that have tapped into this market are experiencing substantial profitability and growth, outpacing traditional competitors and avoiding the pitfalls of commoditization.
The phenomenon of trading up is not limited to the U.S.; it's similarly sized in Europe and is expanding globally, with projections to hit $2 trillion by the decade's end. Business leaders who strategically engage with this segment are poised to benefit significantly, as trading up is a positive, global trend that's here to stay.
Table of contents
01Rise of new luxury market
Trading up is a widespread economic phenomenon that transcends various categories, propelled by robust and enduring forces from both the demand and supply sides. This trend has become so entrenched that it has given rise to three well-recognized types of new-luxury goods and services.
Firstly, there are accessible superpremium items, which, despite their higher price tags compared to standard offerings, remain affordable due to their low-ticket nature. Secondly, traditional luxury brands have introduced more affordable product lines, making them accessible to a broader audience. Lastly, masstige goods, or mass prestige products, occupy a middle ground in the market, offering a premium over standard items while remaining more affordable than superpremium alternatives.
Contrary to the old belief that demand decreases as prices rise, forcing vendors to choose between luxury and mass markets, a new option has emerged. New-luxury products offer superior quality, taste, and aspiration compared to mass market goods, selling at higher prices and in larger volumes than traditional luxury items. This has led to the creation of a new market segment that was previously thought unattainable.
New-luxury products have revolutionized various markets, outperforming traditional leaders by commanding higher prices and achieving greater sales volumes. For instance, Nutro pet food and Belvedere vodka are priced significantly higher than their conventional counterparts but remain accessible to the middle market due to their emotional significance to consumers. Mercedes-Benz has successfully expanded its reach by offering both entry-level and ultra-luxury vehicles, thus increasing its appeal and revenue. Similarly, Bath & Body Works has found a sweet spot with its body lotion, priced between mass-produced and high-end competitors.
02Consumer trading up drivers
The concept of new luxury is not a passing trend but a reflection of deep-seated changes in consumer behavior and preferences. This shift towards premium goods, known as trading up, is fueled by demographic and cultural transformations that have been developing over decades and are expected to persist. Today's middle-market consumers are discerning, with high personal aspirations and significant purchasing power.
These consumers exhibit selective buying habits, choosing to spend more on premium products in certain categories while economizing in others. Their decisions are influenced by both rational considerations, such as product quality and functionality, and emotional factors. For instance, one consumer might prioritize personal care items, pet food, and clothing as categories for luxury spending but opt for value in household cleaners. Another might invest in high-end home appliances, wine, and toys, while saving money by limiting travel and maintaining an older vehicle.
Typically, new-luxury consumers have household incomes starting at $50,000, encompassing around 47 million households in the U.S. The tendency to trade up expands with income; those earning $150,000 or more can afford luxury in numerous categories. As consumers make these selective choices, conventional mid-level products that don't offer the lowest price or emotional appeal are often overlooked.
03Supply forces behind new luxury
The demand for new-luxury goods is being propelled by strong forces on both the demand and supply sides. Consumers now have greater access to capital, even small businesses can tap into global supply networks, and the proliferation of shopping malls has introduced a multitude of specialty retailers into neighborhoods. These factors have made it easier for vendors to develop and market new-luxury goods, a trend that is gaining momentum.
New-luxury goods differ from old luxury or conventional goods in several ways. They are engaging rather than bland or aloof, affordable instead of exclusive, and offer a premium quality that is mass artisanal as opposed to purely handmade. The social basis for new-luxury goods is value-driven, contrasting with the conformist or elitist nature of old luxury.
New-luxury goods are distinctive because they are more accessible than old luxury items, which were exclusive mainly due to their prohibitive prices. New-luxury items command a premium because they integrate elements of craftsmanship, often being "mass artisanal," combining human involvement in production with mass production technologies. This allows for slight variations that enable customers to express individuality and personal style.
04Management keys for new luxury success
Leaders in the new luxury market adhere to eight distinct practices that allow them to create superior products and services, forge connections with customers, grow their businesses, and secure or maintain market dominance. Customers in new luxury categories defy typical stereotypes; they are wealthier, more educated, and more discerning. They become connoisseurs in areas that matter to them, valuing technological innovation, brand heritage, and category advancement. Their deep product knowledge enables them to discern true value, assessing whether prices reflect the value and meet their emotional and financial needs.
Unlike traditional businesses that focus on incremental performance optimization, new luxury vendors aim for significant performance leaps to justify premium pricing. This strategy allows them to earn substantial profits. For instance, BMW, the world's most profitable car company in 2001, earned $1.87 billion from selling 213,127 vehicles, in contrast to General Motors, which made $600 million from over four million vehicles. BMW's success is attributed to its passion for engineering, commitment to technical and functional excellence, and the emotional connection it fosters with customers.
New luxury companies achieve growth while maintaining premium pricing, a concept that defies conventional business logic. They avoid deceiving customers with superficial upgrades or relying solely on brand image. Instead, they focus on meaningful technical improvements that lead to functional benefits and emotional engagement. Callaway Golf's Big Bertha driver exemplifies this approach, offering a larger yet lightweight clubhead that improves a golfer's performance and emotional satisfaction.
Related books
