the new luxury: trading up and trading down · the new luxury: trading up and trading down as we...

Opportunities for Action in Consumer Markets

The New Luxury: Trading Up and Trading Down

New Luxury-Trading_FIN2 11/21/02 2:00 PM

The New Luxury: Trading Up and Trading Down

As we close this year, the prospect of a double-diprecession has brought storm clouds over consumerbusinesses. Retailers and manufacturers have beencaught by an increase in consumer fears and a slow-down in spending. The “wealth health” that a bur-geoning stock market and pulsing real estate marketprovided seems a distant memory for many con-sumers. Consequently, they are looking at discre-tionary purchases with a sharper eye.

But such wariness doesn’t mean the end of opportu-nity for you, our readers. In fact, it has meant theopposite for many brands. A new phenomenon issweeping the landscape: the 25 million U.S. house-holds that constitute the most affluent segment of themiddle market are changing their purchasing pat-terns. They are making different choices about whatgoods and services are important, what constitutesquality, and what they will spend their hard-earneddollars on. As a result, they are trading both up anddown. Shoppers will pay a premium for the highestquality, remain loyal to those brands, and recommendthem to others. But when it comes to commodities,they will look for bargains. It’s the Costco phenome-non across a wide and deep palette.

Consumers are looking at each purchase and askingthree questions:

1. Is it worth the price premium over a private-labelproduct or one of lesser quality?

2. Does it deliver authenticity and value?

New Luxury-Trading_FIN2 11/21/02 2:00 PM Page 3

3. When I use this product or service, does it make astatement to my peers about my taste, lifestyle,knowledge, or sense of adventure? Does it makeme feel better in a troubled and troubling world?

Companies are responding by turning commoditiesinto luxuries or by creating “masstige” products—affordable versions of superpremium goods. Whenretailers and manufacturers offer genuine functionaland emotional benefits, they move off the old price-demand curve and achieve high profits and high-volume sales. Often, it is an industry outsider that hascaptivated consumers by fundamentally redefiningthe category. Brands following this new pattern ofsuccess include Victoria’s Secret lingerie, Starbuckscoffee, Crest Whitestrips tooth whiteners, PaneraBread, BMW automobiles, Williams-Sonoma house-wares, Kraft’s DiGiorno pizza, Ben and Jerry’s icecream, Belvedere Vodka, Diamond Pet Foods,American Girl dolls, and Sub-Zero, Viking, andWhirlpool appliances.

Rapid Adoption

The rise of the “new luxury” is a stark acceleration ofa historical phenomenon. Luxury features and tech-nologies have always trickled down as innovations,which are usually introduced at the high end of themarket, become more affordable and more widelyavailable over time. But now the quality, taste, andsophistication of luxury products are cascading down-market faster than ever before. Producers are drivingthe trend more explicitly and consciously. And con-sumers are embracing it more eagerly. We call it “thedemocratization of luxury,” and we expect it to retainits potency for a decade to come.


Six forces are driving the phenomenon.

First, new-luxury players are supported by a signifi-cant shift in age, marital, income, family, and hous-ing demographics: consumers are marrying later and have more disposable income, fewer children,wealthier parents, and bigger houses than consumersin previous generations. Over the past 50 years, the size of the typical home has more than doubled. Andhigh-tech amenities, such as high-speed data access, are expected to become ubiquitous in U.S. house-holds over the next decade. (See Exhibits 1 and 2.)

Exhibit 1. New Homes Have Become Bigger,Better, and More Affordable

1900 1950 2000

Total number of 16 million 43 million 107 millionhousing units in 60% rural, 36% rural, 24% rural,the United States 40% nonrural 64% nonrural 76% nonrural

Typical new 700 to 1,200 1,000 square 2,265 squarehome square feet, feet, 2 bed- feet, 3 or more

0 to 1 bathrooms, 1 bath- bedrooms, 2 room room bathrooms,

garage for 2 or more cars, central air conditioning, fireplace

Typical financing Cash (long- FHA mortgage Interest rates term amor- rate around around 8% tized loans 4.25%, limited for 30-year not available) number of mortgage,

financing large selection options of financing

options

Homeownership 46.5% 55.0% 67.4%rate

SOURCE: National Association of Home Builders, “Housing Facts, Figuresand Trends 2001.”


Today 1.3 million households in the United Statesearn more than $400,000 and account for 14 per-cent of all discretionary spending. Approximately 12 million households earn more than $100,000 andaccount for half of discretionary spending. Womenhave been the primary force behind the growth inhousehold income. Approximately 77 percent of married women with children work today. They con-tribute 33 percent of household income, and roughly24 percent of them earn more than their spouses.Women are taking the reins on spending, making

Exhibit 2. By 2010, New Homes Will Have More Amenities

Homes will be similar in size but on smaller lots...

• 2,200 square feet

• 3 or more bedrooms

• 3 bathrooms

• Garage for 2 or more cars

• Average lot size: 1,000 squarefeet smaller than today’s average lot

• Neighborhoods with narrowerstreets and fewer paved areas

• More mixed-use communities and “new” traditional designs

• Average sale price: $207,000 to $305,000

...and with more, smarter amenities

• Universal design to allow aging at home (master bedroom andlaundry on main level)

• More efficient heating and coolingsystems (two-zone systems)

• More flexible spaces (convertibleto home office)

• Modular wiring systems

• High-speed data access

• More factory-built components(reducing on-site labor costs)

• More engineered-wood products

• Increased use of steel, concrete,and recycled products

• More materials and products thatrequire less maintenance

• More security systems, telephonelines, energy-management systems, and lighting-control systems

SOURCE: National Association of Home Builders, “Housing Facts, Figuresand Trends 2001.”


decisions about items for the home and for them-selves, and services that help leverage their time.

Second, the capital markets have been responsive toentrepreneurs with winning ideas. Venture capitalfirms specializing in consumer products and new re-tail ideas have helped turn tested concepts into busi-nesses. The entrepreneur with an idea, a prototype,and energy has been empowered with capital.

Third, media role models are reinforcing and legit-imizing purchases that help consumers live and feelbetter. Consider Oprah Winfrey, a leader in the treat-yourself-well movement. Her popular magazine, O,and her syndicated talk show have an extraordinarilyloyal following. She tells her fans to enjoy their lives,take care of themselves, and spend on indulgencesbecause “you’re worth it.” They hear her call andspend to her recommendations.

Fourth, consumers can get more information in ashorter amount of time. New products quickly becomerecognized and enjoy high rates of trial. Word-of-mouth endorsements follow, and retail sales soar.

Fifth, consumers are trading down in order to havethe funds to trade up—a practice we call “rocketing.”Using quality and value as their guides, they seek outless expensive products and services in categories that aren’t as important to them. They are more selec-tive about their spending in general and prefer to pur-chase their core goods from retailers they know andtrust. They are particularly interested in reliable prod-ucts that provide a sense of security and enhance theirself-image.

Sixth, today’s consumers change partners and jobsmore frequently. Between 1961 and 1996, the proba-


bility that a marriage would end in divorce increasedfrom 32 percent to 52 percent. Between 1975 and1996, the likelihood of a second divorce for remar-ried women increased from 44 percent to 58 percent.The average adult has between 9 and 12 intimate rela-tionships during a lifetime and 13 full-time jobs withdifferent employers. Change fosters spending. Dur-ing such transitions, people often seek to “reinvent”themselves with new clothes, furniture, homes, cars,and even an improved physical appearance—engi-neered with cosmetic surgery. (See Exhibit 3.)

Climbing on the Brand Bandwagon

These forces have combined to produce a huge market of consumers who seek to enrich their livesthrough purchases and consider brands to be crucialfor defining themselves and making themselves moreattractive. They want to trade up in many categorieseven if it means they must trade down in others. Butwhether going upmarket or down-market, these con-sumers reject mass-market products that look as if theywere intended for the masses: inexpensive but of poorvalue, convenient but rarely rewarding, and inoffen-sive but hardly distinctive or exciting.

Consumers have an exquisitely sensitive built-in calcu-lator that enables them to assess goods and determineif the price is aligned with the value, and how the costfits into their structure of emotional needs and pur-chasing power. Consumers no longer believe thatexpensive automatically means better. They will makea purchase at a price point that their calculators tellthem is too high, but only if that product delivers avery potent emotional benefit. They will also buywhen their price-value calculators tell them that theprice point is very low and they are getting a bargain.Either kind of purchase can provide a significant


SOURCES: American Society for Aesthetic Plastic Surgery 2001 statisticalreport; BCG analysis.1Breast reduction may be covered by insurance. 2Prices reflect only physicians’ and surgeons’ fees. They do not includefees for the surgical facility, anesthesia, or other costs related to surgery.Figures for procedures often performed on more than one site in thesame session (such as Botox injections) reflect typical fees for one site.

Top Surgical and Nonsurgical Cosmetic Procedures in 2001

Exhibit 3. A Procedure for All Price Points

Face-lift

Breastreduction(women)1

Laser leg-vein treatment

Chemical peel

Laser skin resurfacing

Liposuction

Eyelid surgery Forehead lift

Breast augmentation

Nose reshapingTummy

tuck

Microdermabrasion

Sclerotherapy

Collagen injection

Botulinum toxin injection (Botox)

Laser hair removal

Average 2001 price ($)2

Number ofprocedures (thousands)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

0

500

1,00

0

1,50

0

2,00

0

2,50

0

3,00

0

3,50

0

4,00

0

4,50

0

5,00

0

5,50

0

6,00

0

Nonsurgicalaverage:$498

Average:$1,032

Surgicalaverage:$3,308


“shopping rush”—an excitement so real it can actu-ally be measured in a quickened pulse and shallowbreathing.

Consider two very different products that are primeexamples of the new luxury: BMW automobiles andAmerican Girl dolls. Both sell to the premium seg-ment, and both lay claim to the following:

• The highest loyalty and repurchase rates in theirindustries

• Controlled retail execution

• Mythic marketing

• A continuous stream of innovations to excite theiraudience

• Significant price premiums that cover the cost ofthe best materials and components

Escaping the Average in a BMW

BMW manages the technical-, functional-, and emotional-benefits ladder particularly well. It wasfounded as an aviation engine company, replacingslow and not-so-dependable Daimler engines onFokker fighters during World War I. From the timethey were installed late in the war, the engines werethe most dependable in aviation, and they allowedpilots to go higher and dive faster. That is the heri-tage on which BMW rests, and it is evident in allaspects of the company’s strategy.

Today BMW, the producer of the “ultimate drivingmachine,” is the most profitable car company in theworld. A board member puts it this way: “BMW pro-


duces premium cars, not luxury cars, and they are engi-neered by people who love cars. Other car companiesconcentrate on ‘visible’ features. We make the bestvehicle. We are the advocates for drivers. We inventedantilock brakes and traction control. A five-year-oldBMW still looks new. We have a design that lasts.”

Coming from aviation and then motorcycles, BMWentered the performance automobile business as anoutsider and has never followed the established rulesof car marketing. The company focuses on loyalty,repurchase rates, quality improvements, and cutting-edge innovations in automotive engineering. BMWsare built on the pure aesthetics of speed and driving.

BMW’s chief marketing officer describes the com-pany’s target customers as people “who work hardand play hard. They treat fun seriously. They enjoydriving. They have high personal energy. Quality isvery important, and they are prepared to pay more.Sometimes they don’t even take the most direct routeto work if there is a better road for driving. They feelcompletely at peace—protected and invigorated intheir driving environment. They are far more likely to wash their cars than other people in the same in-come cohort. One of the company’s managementmaxims is that it is the customer who decides on thequality of our work. The customer decides on BMW’sright to exist.”

BMW emphasizes authenticity and stays true to thebrand’s core ethos. The company operates by strictdesign principles, which require the very best compo-nents, and incorporates substantial innovations andimprovements into every redesign. The cars are themost expensive in their product segments and there-fore sell at premiums. But they are not about luxury.Their allure starts with the engine, which has themost intricate design and the most power in its class.


Ted, a reconstructive surgeon in Dallas, is a typicalnew-luxury consumer and the kind of buyer BMWattracts. Ted’s wife is also a physician, and they havetwo children. Ted bought his first BMW—a cham-pagne 7 Series with a tan interior—in 1996. “First welooked at a Lexus,” Ted explained. “But in the testdrive, the salesperson drove it 20 miles an hour. Thenwe went to a BMW dealer and got a salesperson whoused to sell cars for Lexus and Mercedes. She knewthat she was selling a hot car with power. My wife wentfor a test drive, and she came back with her hair stand-ing up. The car was a kick. It seemed as if it were air-borne. She was on highway access roads doing 80 milesan hour and coming to a screeching stop. The brakesnever failed. It was like being at Six Flags on a rollercoaster, only better. I now have had four BMWs and I’ll never ever drive anything else.”

The new 7 Series is a good example of BMW’s designadvantage. It offers an “intelligent” safety and informa-tion system, 20-way adjustable seats, active roll stabili-zation, “stepless” electronic damping control, park-distance control, a six-speed automatic transmission,tire-pressure monitoring, adaptive lights that increasevisibility during hard braking, break-resistant securityglass, voice-activated navigation, and rain-sensingwipers with a heated fluid supply. It also offers a micro-filter ventilation system, hill descent control, and amayday system that automatically opens a direct line to a live person for roadside assistance. In the pastdecade, BMW was first to introduce corner brake control, advanced side-airbag protection, and rolloverprotection. The engine on the 7 Series is a 4.4-liter V-8, which delivers 325 horsepower with accelerationfrom zero to 60 miles per hour in just 5.9 seconds.

At the other end of the market, BMW recently reintro-duced the Mini Cooper with tremendous initial suc-


cess. The Mini is an old idea with a new twist, broughtback to life through a separate division and a newbranding approach and distribution system. It is apowerful combination of bold design, performancefeatures, and iconoclastic branding at an accessibleprice point: the list price is $19,850. Standard ameni-ties in the Cooper S include a six-speed 163-horse-power engine, a six-speaker CD stereo, air condition-ing, and six airbags.

The tag line for this remarkable car is “Live me, dress me, protect me, drive me.” Buyers get to cus-tomize their Minis with colors such as chili red, velvetred, silk green, and pepper white. Options includepark-distance control, rain-sensing wipers, perfor-mance tires, and a panoramic sunroof. An automotiveexpert says, “Pound for pound, inch for inch, there’smore fun and charm packed into the diminutive 2002 Mini than there is in any other car on the mar-ket.” Or, as BMW claims in its new ad, “Small is thenew black.”

Through clever segmentation and maniacal adher-ence to its core identity, BMW has extended its posi-tion in the premium segment. In last year’s downeconomy, BMW automobile deliveries grew 10 per-cent. This year, the company will again see double-digit growth and substantial share gain. BMW hasmanaged to make its brands both more accessibleand more aspirational, with a top price that is nearlyseven times its lowest.

BMW drivers aren’t just owners; they are apostles who hear the engine, feel the road, and experiencethe drive. They love their cars. Here’s how BMW customers describe it: “The car drives like a dream.”“The car and I are one.” “My car sees the curves and smiles.” “I feel like a cheetah.”


Entertainment and Education: A Mother’s Dream

Many of the most successful new-luxury brands areborn in frustration—usually when the future founderof the brand directly experiences the compromisesforced on consumers by standard products. PleasantRowland, a former elementary-school teacher andwriter of educational materials, wanted to buy herniece a doll, but she didn’t like the Barbie andCabbage Patch offerings that dominated the shelves of toy stores everywhere. She objected to the materials,components, and design of these mass-market prod-ucts, not to mention their lack of educational value.

So Rowland started a company to produce somethingbetter, but it doesn’t consider itself to be a doll com-pany. Rather, American Girl sells history, education,entertainment, empowerment, authenticity, and imagi-nation all wrapped up in top-quality workmanship andmaterials. The doll collection features eight charactersfrom various eras, from its newest creation, Kaya, aNative American girl of the Nez Perce tribe living in1764, to Molly, a World War II–era girl in the Midwest.Books about the characters and historically accurateaccessories—clothes, furniture, and toys—provide atangible piece of history.

Samantha, an eight-year-old fan of American Girldolls, told us that her doll, also named Samantha, isher best friend. The Samantha doll is American Girl’snumber one seller. This character is a nine-year-oldorphan living with her grandmother in New York Cityat the beginning of the twentieth century. AmericanGirl offers six volumes of stories about Samantha, soSamantha (the girl) knows where her friend grew upand how she made it through tough times. “I love todress her and care for her. I even have clothes thatmatch hers so that we can dress alike.” One day,


Samantha (the doll) was injured when the girl’sbrother tossed her out a window. Samantha’s mothercalled American Girl and was told to return the doll tothe company for repairs. She came back as good as new from the “doll hospital” after being treated by a“doctor.” She even had a hospital bracelet on her wrist.

Word-of-Mother Marketing

Samantha’s mother found out about American Girlfrom the mother of her daughter’s friend. Now she tells her friends to “buy the doll that comes with a his-tory lesson.” “If you want your child to read and to have perspective on her place in the world,” she ex-plains, “then get her an American Girl doll and thebooks that go with it.” That’s word-of-mother marketing.

American Girl dolls cost around $85—a 400-to-800-percent premium over the most popular dolls. Butmany mothers feel that providing their daughters witha wholesome, inviting way to learn through fantasyabout heroines that prospered under difficult condi-tions is worth that price. The brand commands ex-traordinary loyalty, and girls clamor for the continuousstream of product extensions that build on the originalidea (including a monthly magazine with a circulationof 650,000). With return rates of less than 2 percent,the company has a lot of satisfied customers. TodayAmerican Girl has the highest-performing retail storeon Chicago’s Michigan Avenue. The company gener-ates annual revenues of $370 million and continues togrow at double-digit rates.

Shattering Conventions

The new luxury is not a marketing strategy but a wholenew way of looking at business and the world. And it


has shattered conventions in most aspects of market-ing and branding, including assumptions about priceceilings, price ranges, brand extendibility, consumersophistication, market stability, and the time it takesluxury to cascade to the middle market. New strate-gies are required to win in this game. Here are sevenpractices that a new-luxury player can follow to trans-form a category or brand.

1. Don’t underestimate the consumer. Consumers willtrade up to higher levels of quality, taste, and aspi-ration if the benefits are worth it.

2. Move off the demand curve, not along it. With abold vision, you can price up, spend back, and reapdisproportionate profits.

3. Create a technical-, functional-, and emotional-benefits ladder. Offer functional advantages thatare tied to targeted emotions as well as a technicalplatform that lends credibility to functional claims.If your strategy is well executed, consumers will ladder from technical to functional to emotionalbenefits, responding so powerfully that you canbreak through the traditional price barriers by creating greater demand.

4. Escalate innovation, elevate quality, and deliver a flawless experience. Technical and functionaladvantages are short-lived. The quality bar is risingat all price points.

5. Stretch the brand over a broader price range withincreasingly precise segmentation. New-luxury play-ers often have a five- to tenfold spread betweentheir highest and lowest price points. They take thebrand upmarket for aspirational appeal and extendit down-market to make it more accessible andcompetitive.


6. Create and own brand apostles. Heavy users drivevolume and spread the word. In categories of fre-quently purchased goods, the top 10 percent of cus-tomers generate up to half of the category’s salesand profits.

7. Attack your category as if you were an outsider.Since outsiders typically generate most of the dis-ruptive innovations, incumbents must find a way tobreak the pattern by creating their own innovations.

* * *

For established competitors, especially those targetingmiddle-market consumers with midlevel products, thenew luxury can be an opportunity or a threat. Meetingthe challenge will require a new frame of referenceand a different kind of leadership: more imaginationand less dogma, more courage and less convention,more creativity and less incrementalism. When facing a new-luxury rival that enters the market at a tremen-dous price differential, many executives will declare,“There can’t be enough volume at that price point!”But there can be if the product offers the right combi-nation of technical, functional, and emotional bene-fits. The democratization of luxury gives imaginativeleaders a new way to think about growth, profitability,and the art of fulfilling dreams.

In an uncertain economy, it takes courage to pursue atrading-up strategy. In the face of softening categorydemand and pricing pressure, many brand managersare undoubtedly looking at ways to trim a few penniesfrom their product costs in order to protect margins.Either by choice or by fate, they will trade their cus-tomers down.

Those with vision and leadership will take a differentroute. They will ask: “How can I invest more in product


quality and design? How can I strengthen my openingprice position while extending my brand upmarket?How do I leverage the emotional power of my brand?How do I up the ante in a down economy?”

We hope that 2003 will bring you inspiration, innova-tion, excitement—and success in trading up.

Michael SilversteinNeil Fiske

Michael Silverstein is a senior vice president and director inthe Chicago office of The Boston Consulting Group andhead of the firm’s global Consumer practice. Neil Fiske, avice president and director, is head of BCG’s Chicago office.

You may contact the authors by e-mail at:

[email protected]

[email protected]

© The Boston Consulting Group, Inc. 2002. All rights reserved.


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the new luxury: trading up and trading down · the new luxury: trading up and trading down as we...

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