Is Starbucks stealing your business?
here’s a
growing phenomenon that’s sweeping America and, for that
matter, the rest of the industrialized world. It’s called
trading up. What this means, and what’s been happening,
is that the average consumer, and especially the middle-class,
has been opting to purchase the $4 Vente latte at Starbucks
instead of the standard ninety-nine cent coffee found anywhere.
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Contrary to what many may presume, this
phenomenon is driven by middle-class customers who are
educated, discerning, and are eager for the goods and services
they consume.
They balance their budgets and trade down
in more categories than they trade up in. They are willing,
even anxious, to pay premium prices for products and services
that offer higher levels of quality, but are not so expensive
as to be out of reach.
The average middle-market customer is
disappearing. More and more, the middle-market customer is a
person who selectively trades up to new and better products and
services and trades down in others to pay for their premium
purchases.
These consumers are so knowledgeable,
selective, affluent, and discerning that businesses must listen
and respond to them as never before. And, although the primary
traders up are relatively affluent — earning $50,000 a
year and more — the effects of New Luxury goods spread
benefits to people of all income levels. By polarizing the
market, a New Luxury service does not drive out low-cost
businesses; rather, it helps ensure their continued existence.
The social and economic motives that are
producing this trend include: increased discretionary wealth;
the changing structure of the American household; and a
noticeable change in values. The trading up phenomenon is more
than just a passing fad. It has become a long-lasting aspect of
our consumer-driven global economy.
The dramatic transforming effect of
trading up and trading down, can be seen in many different
industries, including drycleaning. Trading down occurs when
consumers choose the low-cost alternative in categories of
little importance to them, and is an essential part of the
overall trend.
Without the availability of low-cost
alternatives and products in a wide range of categories, many
consumers would be unable to afford the “New
Luxury” goods and services they want to buy in the small
number of categories that are most meaningful to them.
In one industry after another, the
development of New Luxury brand such as Panera Bread, Belvedere
vodka, Callaway golf clubs and Victoria’s Secret,
combined with trading up and trading down behavior, has caused
their respective industries to polarize.
Both the growth and profits in these
industries have moved to the high and low ends of the price
spectrum. While companies offering the “old
stand-bys” become stuck in the middle and struggle to
succeed and even survive.
The New Luxury sweet-spot is where
companies are able to change the traditional supply and demand
curve and achieve high profit margins and high volumes at the
same time.
The 20-40-60 Rule
Recent research has shown that New Luxury
products and services typically account for up to 20 percent of
an industry’s unit volume, 40 percent of its dollar
volume, and an impressive 60 percent of its profits. These
percentages are so prevalent that this is now being called the
“20-40-60 Rule.”
New Luxury is taking place in many
categories. Even in areas like financial services and
healthcare, we are seeing the emergence of companies that are
creating premium offerings, targeted to the mass affluent,
which display genuine product and service differences along
with emotional appeal.
I recently read an article detailing the
availability of $800, front row, reserved seating at the New
Orleans Jazz and Heritage Festival, For over 25 years, this had
been an equal opportunity, sit on the lawn, open air concert
series. Everyone paid the same admission price for first-come,
first-served seating. Even Disney World and Disney Land now
offer premium tickets for those willing to pay more for one of
life’s New Luxuries.
Only a small number of drycleaners have
positioned themselves to fulfill consumers’ desires for
New Luxury drycleaning. And, as might be expected, a large
number of cleaners are moving into the high-volume, low-priced
arena of discount drycleaning. While their positioning is
mostly based on the misconception of “high volume equals
high profits,” the ultimate losers will be the
traditional, middle-of-the-road drycleaners.
Strangely enough, consumer buying of New
Luxury products and services doesn’t seem to be affected
by economic conditions, and the performance of companies
providing these New Luxuries remains strong, even in an
economic downturn.
This consumer behavior of trading up is
increasing rapidly and is being followed even by consumers who
are not affluent. Now that most consumers can afford to buy
those things that fulfill their basic survival needs and still
have cash available, they are buying products and services that
are emotionally meaningful to them.
It’s not surprising that trading up
is a long lasting phenomenon because, in fact, it is not really
new. Around the world, people have been trading up —
seeking to enrich their lives and pleasure their senses and
emotions with premium products — for centuries.
What’s different about trading up today is its
availability to a much larger percentage of the population, and
there are many more premium goods and services to trade up to.
Every man a king
There is another difference: our attitude
about consumption. Today, the opulent lifestyles of the rich
and famous are communicated to us incessantly through every
form of media. Most people wonder about, if not yearn for, what
it would be like to participate in a life of total luxury. And
now, they are being given the chance to experience some of
these ultimate luxuries.
Because they can elect to trade down and
buy cheaper in areas that are of lesser importance to their
emotional well being, they are thereby given the resources to
trade up in other areas that are more meaningful to them.
For instance, if a person is willing to
buy generic or store-brand food items at the supermarket, as
opposed to buying named brands, the money saved will easily be
enough to afford them a latte or two at Starbucks.
The Golomb Group is particularly
interested in working with drycleaners who are already, or
would like to, position their businesses as a service to be
traded up to.
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