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.
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. New-luxury goods differentiate themselves by not just competing on price but by offering superior quality, performance, and emotional appeal. Consumers often develop a stronger and more enduring emotional connection to these products compared to old-luxury goods, which traditionally relied on status and exclusivity. To succeed, new-luxury products must deliver on three levels: they must feature technical innovations that imply quality and justify their premium pricing; these innovations must enhance functional performance; and they must emotionally engage customers. When a new-luxury brand effectively delivers on all these fronts, it can transform its market category, as seen with brands like Starbucks, Kendall-Jackson, and Victoria's Secret. Michael Silverstein and Neil Fiske highlight that consumers, including those with lower incomes, may spend disproportionately in certain meaningful categories, a behavior known as 'rocketing.' This leads to a 'disharmony of consumption,' where buying habits do not always align with income levels, resulting in mixed shopping patterns like purchasing at Costco while driving a Mercedes. Silverstein and Fiske argue that trading up is fundamentally positive, emphasizing that it is not about luxury or class but about enhancing life through premium goods. This behavior is prevalent among middle-class consumers who are educated, discerning, and actively engage with the products and services they consume. They are conscious of their budgets, often trading down in more categories than they trade up. Trading up is not confined to the United States; it is a global trend observed in the UK, Scandinavia, Japan, and beyond. It holds significant relevance and influence across various regions, including Europe, Canada, Australia, and Japan, demonstrating its universal appeal and impact.
book.moreChapters
