TRADING UP

Why Consumers Want New

Luxury Goods – And How
Companies Create Them
MICHAEL SILVERSTEIN and NEIL FISKE
 Trading Up - Page 1

MAIN IDEA
The tastes and preferences of American middle-market consumers (those earning $50,000 and above annually) are changing and
evolving. More and more, they are starting to be willing to “trade up” in some areas – to pay a premium price for products and services
that provide a greater level of quality than typical mass market offerings. As a result, a new “sweet spot” is emerging in the
marketplace which is called “New-Luxury”. It is estimated around $400 billion in new-luxury goods were sold in the US in 2003 and this
level of sales will continue to grow at about 15-percent per year to reach $1 trillion by the end of this decade.
Conventional business wisdom has always stated: “The higher the price, the lower the volume”. Therefore, companies traditionally
decided whether they would chase the luxury market with very highly priced offerings or target the mass market with more modest
pricing and features to match. New-luxury products make that trade-off obsolete. New-luxury products and services sell at
comparatively high volumes, despite their relatively high price levels. And therefore, companies at the forefront of selling new-luxury
goods can achieve a high rate of profitability and growth which is beyond the reach of conventional competitors. The new-luxury
marketspace also offers vendors an opportunity to escape the impact of commoditization on their core businesses.
Interestingly, trading up is not just a US phenomena. It is about the same size in Europe, and is growing at a similar rate. It is also now
well established in all the major economies of the world, and should reach $2 trillion by the end of this decade. This is very positive
news for those business leaders who are astute enough to position their firms advantageously in this market segment.
“Trading up is positive, global, and here to stay.” – Michael Silverstein and Neil Fiske

1. The emergence of the new-luxury marketspace . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pages 2 - 3

Trading up spans virtually every category of the economy. It is being driven by fundamental, long-term and
strong forces on both the demand side and the supply side. The trading up phenomena is now so well
established that three distinct forms of new-luxury goods and services are widely known:
1. Accessible superpremium – low-ticket items priced at a considerable premium.
2. Old luxury brand extensions – lower priced versions of products traditionally sold to the very rich.
3. Masstige goods – mass prestige goods which command a premium but are still affordable.
2. The key drivers of the trading up phenomena for consumers. . . . . . . . . . . . . . . . . . . . . . . . . . Pages 3 - 4
New-luxury is no fad. It is being driven by fundamental, long-term changes in consumer preferences and
circumstances. Trading up is being driven by a combination of demographic and cultural shifts that have
been building for decades, and will continue to increase in the foreseeable future. Instead of the average
middle-market consumer being unassuming and unsophisticated, today’s middle-market consumers are
discerning, have high personal aspirations and substantial clout as a result of their buying power.
3. The supply side forces that fuel new-luxury goods. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 5
In just the same way as strong forces are driving the demand side of new-luxury, there are also strong
supply-side forces at work. Entrepreneurs have unprecedented access to capital. Even small businesses
now have the capacity to tap into global supply networks. Shopping malls have brought many more
specialty retailers into neighborhoods than ever before. All of these factors have combined to make it
easier than ever for vendors to develop and market new-luxury goods. And this trend is only just beginning
to gather momentum.
4. The eight key management practices of successful new-luxury creators. . . . . . . . . . . . . . . . . . . . Pages 6 -8
New-luxury leaders follow a distinctive set of practices which enable them to create premium products and
services, connect with customers, build their companies and establish or maintain market leadership.
These practices are:
1 Never underestimate the customer’s desire to trade up.

2 Make major leaps, not incremental improvements.

3 Create a progressive ladder of genuine benefits.

4 Focus on innovation, quality and overall customer experience.

The 8 management
practices of 5 Extend your brand both up-market and down-market.
new-luxury leaders
6 Customize your value chain to deliver the ladder of benefits.

7 Use influence marketing and brand evangelists.

8 Continually attack the category like an outsider.

 Trading Up - Page 2

In fact, the trading up phenomena is now so advanced that three

1. The emergence of the new-luxury marketspace
distinct forms of new-luxury products are well known:
1. Accessible superpremium products – low ticket items which
Trading up spans virtually every category of the economy. It is are priced at or near the top of all products in their category.
being driven by fundamental, long-term and strong forces on These products are still affordable to middle-market
both the demand side and the supply side. The trading up consumers because of their low-ticket natures. For example,
phenomena is now so well established that three distinct forms of Nutro pet food sells at 71-cents per pound, a 58-percent
new-luxury goods and services are widely known: premium to Alpo pet food. Or Belvedere vodka sells for $28 a
bottle, an 88-percent premium over Absolut vodka which
1. Accessible superpremium – low-ticket items which are priced
sells for $16 a bottle. The basic idea here is that almost
at a considerable premium to conventional offerings.
anyone can afford to buy one of these products if these
2. Old luxury brand extensions – lower priced versions of categories are emotionally important to them for whatever
products traditionally sold to the very rich. reason.
3. Masstige goods – mass prestige goods which command a 2. Old-luxury brand extensions – lower-priced versions of
premium over conventional products but are still priced well products which have normally been available only to the rich
below super-premium goods and are therefore affordable. – defined as households earning $200,000 or more each
year. Mercedes-Benz, for example, now sells an entry-level
The traditional view was that demand dropped off the higher your C-class coupe for $26,000 making it an option for
product was priced. Therefore, vendors had to make a deliberate middle-market consumers. At the same time, Mercedes is
choice whether to go after the luxury market or to target the mass also extending its brand at the top end as well, offering a
market instead: Maybach for more than $300,000. This is an impressive
strategy, because Mercedes-Benz is increasing its revenues
and becoming more accessible at the same time as it is also
Volume becoming more aspirational.
New-Luxury 3. Masstige (short for mass prestige) goods – these products
Mass are neither at the top of their category in price nor related to a
Market more exclusive brand. Instead, masstige goods occupy a
sweet spot in the market somewhere between mass
produced and high end products. Masstige goods command
a premium over conventional products but are still priced well
below superpremium products. For example, Bath & Body
Luxury Works sells a body lotion for $1.13 an ounce which competes
Price successfully against Vaseline Intensive Care (about
30-cents an ounce) and Kiehl’s Creme de Corps (about $3
per ounce).
In more and more markets, however, a third option is emerging. Whereas conventional goods tend to compete primarily on price,
This is for new-luxury products which possess higher levels of new-luxury goods command a premium on the basis of superior
quality, taste and aspiration than mass market goods. They sell quality, performance and emotional appeal. Consumers tend to
at much higher prices than conventional goods, and in much have a much stronger emotional attachment to new-luxury
larger volumes than traditional luxury goods. They therefore take goods. Further, this engagement is frequently more intense and
a position on the chart above that was previously considered to long-lasting. This emotional attachment is in contrast to the
be unattainable. attraction of old-luxury goods, which generally relied on status,
class and exclusivity to drive sales.
Put another way, the traditional perspective that markets could
be separated into two generalized segments is now in the The emotional attachment customers feel for new-luxury goods
process of being superceded by a t hree segment occurs whenever the vendor connects with the customer on all
characterization of the marketplace: three levels of a ladder of benefits:

Traditional Emerging A successful new-luxury

1 product or service
“Old” Luxury
1 Luxury
2 “New” Luxury Engage the
2 Commodity customer emotionally Level 3
3 Commodity
Superior functional
performance Level 2
In category after category, new-luxury winners have emerged,
effectively dethroning traditional leaders and transforming the
Technical features
entire category by selling at higher prices than conventional Level 1
and differences
goods and in greater volumes than traditional luxury goods ever
achieved.
 Trading Up - Page 3

A new-luxury product must deliver on three levels:

The key drivers of the trading
1. It must offer technical features which are different from those 2.
up phenomena for consumers
of its competitors. These differences may be in design, in
technology or both. Implicit within this customer awareness
of technical features must be an assumption of quality – that New-luxury is no fad. It is being driven by fundamental, long-term
the product will be free from defects and perform as promised changes in consumer preferences and circumstances. Trading
so as to justify premium pricing. up is being driven by a combination of demographic and cultural
2. Those technical differences cannot just be for cosmetic shifts that have been building for decades, and will continue to
purposes, but must contribute to superior functional increase in the foreseeable future. Instead of the average
performance. The new-luxury product must perform better middle-market consumer being unassuming and
rather than having “improvements” that don’t actually do unsophisticated, today’s middle-market consumers are
anything worthwhile. discerning, have high personal aspirations and substantial clout
3. The technical and functional benefits must combine to as a result of their buying power.
engage the customer emotionally. Other factors like the
perception of the brand will also get added in to the mix but By and large, new-luxury consumers tend to have highly
ultimately, customers need to make an emotional connection selective buying behaviors. They make a conscious decision to
on the strength of what the new-luxury product does. trade up to premium goods in specific categories of choice and
then trade down in most other categories of personal
“Whenever a new-luxury brand solidly delivers the ladder of
expenditure. Their criteria for deciding in which areas to trade up
benefits, it can catch fire. It will take hold in the minds of
and which areas to trade down are both rational (based on
consumers, quickly change the rules of its category, grow to
technical and functional considerations) and emotional.
market dominance – as Starbucks, Kendall-Jackson and
Victoria’s Secret have – and force a redrawing of the demand
curve. As that happens, the category tends to polarize. Personal care products Pet food Clothing
Consumers shop more selectively. They trade up to the premium
new-luxury product if the category is important to them. If it isn’t,
they trade down to the low-cost or private-label brand, or even go Consumer
without.” #1
– Michael Silverstein and Neil Fiske
“Consumers, especially those at the lower end of the income Household cleaners
spectrum, often spend a disproportionate amount of their income
in one or two categories of great meaning, a practice called
For example, consumer #1 has made a personal choice to buy
‘rocketing’. The combination of trading up and trading down
new-luxury items in three key categories, personal care
leads to a ‘disharmony of consumption’, meaning that a
products, pet food and clothing. As far as household cleaners go,
consumer’s buying habits do not always conform to her income
however, consumer #1 is happy to trade down and buy
level. She may shop at Costco but drive a Mercedes, for
whichever product offers the best value.
example, or buy private-label dishwashing liquid but drink
premium Samuel Adams beer.”
– Michael Silverstein and Neil Fiske Home appliances Wine Toys
“We believe that trading up is fundamentally a positive
phenomenon. It is not really about luxury, at all, nor is it about Consumer
class, conspicuous consumption, or debt. Consumption is a way #1
of life and it can be done well or poorly, and trading up to premium
goods is one way to do it well. Most consumers, no matter what
their class or status, use goods to help alleviate the stresses of Travel Automobiles
modern life and to help realize their aspirations. Most people do
not fool themselves that such goods solve their root problems or Consumer #2, by contrast, has a different set of priorities and
take the place of essentials like wellness and human connection. preferences. This customer trades up in the areas of home
Most people are well aware of the limitations of goods. They are appliances, wine and toys. To save money, consumer #2 doesn’t
also well aware of their delights. This phenomenon is driven by travel much at all and drives a 10-year old car because it meets
middle-class consumers who are educated, discerning, and basic transportation needs.
ready to engage in the goods and services they consume. They
balance their budgets and trade down in more categories than The typical new-luxury consumer has an average household
they trade up.” income of $50,000 or more – roughly about 47 million
– Michael Silverstein and Neil Fiske households in the United States. The higher the consumer’s
income, the more categories they want to trade up in. Once
“Trading up is actually a global phenomenon, with the UK, consumers have a household income of $150,000 and above,
Scandinavia, and Japan matching the US in growth. It is as they can afford to trade up in a large number of categories. And
relevant and powerful in Europe, Canada, Australia, Japan and as consumers make deliberate choices to trade up and trade
other parts of the world as it is in the US.” down, they ignore the conventional, mid-level products which fail
– Michael Silverstein and Neil Fiske to deliver any compelling reason to buy – either the lowest price
or emotional engagement.
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So what, specifically, has led to the rise of the trading up Generally speaking, new-luxury consumers buy goods that
phenomena? It is the result of a large number of social factors engage their emotions more than simply filling a functional need.
and business factors coming together: There are four emotional spaces which characterize these
n American households now have more discretionary wealth emotions quite concisely:
available which can be spent on premium goods. From 1970
to 2000, real household income rose by more than
50-percent. In addition, the value of investments and
1 Taking care of me
accumulated wealth has grown.
n The market value of homes has increased, meaning many
homeowners are worth more today than ever before. There is
some $8 trillion in home equity, with the average homeowner Individual Emotional
having at least $50,000 in equity. There has also been a rise in 4 2 Connecting
Style Spaces
second home ownership.
n Large discount retailers like Wal-Mart, Costco, Home Depot,
Circuit City and others have passed savings on to consumers
freeing up more money that can be spent on selectively 3 Questing
chosen new-luxury items. By some estimates, more than
$100 billion has been freed up in this way in 2001 alone.
1. Taking care of me – These consumers trade up to feel good.
n More women than ever before are working and earning higher They want to be physically rejuvenated, pampered, made
salaries – meaning women feel like they have a right to spend comfortable and even self-indulged. They want time for
on themselves. Furthermore, women have an excellent ability themselves to reduce stress. They will buy premium personal
to judge the value of goods, and are often prepared to care products, spas, health care, gourmet in-home foods,
purchase products that meet their important emotional needs. linens and bedding.
n The family structure is evolving. Many people are getting 2. Connecting – These are consumers who had put off getting
married later in life and having fewer children – leaving them married in order to build their careers. They want to feel
more money to spend on themselves. In addition, working attractive and to belong. These consumers are, therefore,
mothers are increasingly prepared to pay a premium for any willing to pay premium prices to buy new-luxury quality
new-luxury items which will lighten their workloads and soothe clothing, dining out and home theater equipment. They are
their souls. also likely to have pets they spend money on and are inclined
n Consumers are becoming better educated, more to go on cruises where they’ll have opportunities to hook up
sophisticated, well traveled, more adventurous and more with like-minded members of the opposite sex.
discerning. More Americans have college educations and 3. Questing – These are the people who crave adventure. They
appreciate the benefits of learning more keenly. The majority will buy anything that will enrich their lives, deliver new
of Americans have traveled overseas, and are aware of experiences and provide some adventure. They will,
goods available in Europe, in Japan and other more exotic therefore, purchase premium travel services, cars, sports
regions of the world. These travelers then return with an equipment, computers and wine. They’re always on the
enhanced appreciation for new tastes, new looks, different lookout for unusual things and will pay more for them.
goods and loads of fresh ideas to incorporate into their own
lifestyles. In addition, the availability of the Internet gives 4. Individual style – These consumers want to express
consumers the ability to learn about specific products and the themselves by the purchases they make. They buy
companies that make them. new-luxury products which fit with their own personal brand
preferences and tastes. They align themselves with those
n Consumers have picked up on the cultural signals that it’s products for which they have a personal affinity as a way of
alright to spend. Traditionally, hard work has been highly signaling what’s important in their lives. Categories which
valued and over consumption has been frowned up within reflect individual style include watches, cars, spirits,
American society. Since the 1960s, however, there have accessories and lingerie.
been a barrage of messages telling consumers it’s important
to reach for your dreams, look after number one and build Note these four emotional spaces are generalizations, and there
self-esteem. Influencers like Oprah Winfrey and Martha are no definitive sharp boundaries between them. Sometimes
Stewart encourage consumers to live and experience more, the spaces are in conflict. At other times, a product or service
and to have fulfilling and happy lifestyles. The same may engage the emotions in more than one space at any time.
messages are put forward in many broadcast television Other elements, notably morality and values, also come into play
shows which regularly mix entertainment with consumption. when consumers are making purchase decisions.

The combined results of all these shifts in society have given “New-luxury consumers are complex creatures. They have
American consumers greater purchasing power, more wealth and sophistication. They are driven by fears but have high
knowledge, a broader range of goods to purchase and the desire aspirations. They want it all, but are often exhausted by trying to
to do so. This surge in buying power is not limited to just one or get it. They spend liberally on themselves, but they also believe
two demographics, but is widespread. Almost every consumer they should do right for the world. They rocket, they trade up,
with means gives himself or herself permission to deliberately they trade down. They follow fashion and scoff at it. New-luxury
trade up to premium goods in specific categories while at the customers need a lot of understanding. They are a growing force
same time trading down in many if not most all other categories of consumers – one to be reckoned with.”
of purchases. The selection criteria most people use is a – Michael Silverstein and Neil Fiske
combination of rational and emotional factors.
 Trading Up - Page 5

n Access to flexible worldwide supply-chain networks –

3. The supply side forces that fuel new-luxury goods
enabling smaller companies to use foreign markets to source,
manufacture, assemble and distribute goods. Facilitators are
also available who will help create, optimize and manage
In just the same way as strong forces are driving the demand
supply-chain networks for their clients. All of this means
side of new-luxury, there are also strong supply-side forces at
retailers can participate in the product design process rather
work. Entrepreneurs have unprecedented access to capital.
than simply acting as channels of distribution.
Even small businesses now have the capacity to tap into global
supply networks. Shopping malls have brought many more n Increased speed of innovation – it has now become easier for
specialty retailers into neighborhoods than ever before. All of designers to clone the style, design features, technology or
these factors have combined to make it easier than ever for materials from high-end products and incorporate them into
vendors to develop and market new-luxury goods. And this trend premium goods. Consumers are pushing manufacturers to
is only just beginning to gather momentum. incorporate more technology into their top-end products, and
these features are then cascading down into other price
points at a faster rate than ever before.
The key differences between new-luxury goods and those that
n Flexibility in manufacturing processes – allowing new-luxury
can be classified as old luxury or conventional are:
goods makers to ramp up production quickly when demand
increases. Typically, new-luxury manufacturers will
New-luxury Commodity Old Luxury outsource complex or expensive manufacturing steps and
then retain the final assembly functions in-house so that
Affect Engaging Bland Aloof individual product orders can be met. (This is the essence of
the mass-artisanal approach).
Availability Affordable Ubiquitous Exclusive
New-luxury consumers don’t automatically assume if something
costs more it must be better. They are sophisticated enough to
Price Premium Low cost Expensive
tell when they are being offered superficial improvements and
Mass Mass when genuine benefits or real differences are incorporated into a
Quality Handmade product. New-luxury isn’t really about astute marketing. Instead,
artisanal produced
new-luxury goods have to deliver on three levels:
Social basis Value driven Conformist Elitist 1. Technical features that are different.
2. Genuine enhanced performance.
3. Emotional engagement with the consumer.
In other words, new-luxury are a very distinctive class of goods. Very often, new-luxury goods are created by companies who are
Whereas old luxury items were exclusive mainly because of the an outsider to the category. They come in free of the constricting
prohibitive prices charged, new-luxury goods are far more assumptions of the industry insiders. They import fresh ideas
affordable. New-luxury items command a premium because they and practices from other industries. Outsiders don’t have any
integrate elements of craftsmanship. Many new-luxury goods feel for how many units can be sold at any particular price point
are “mass artisanal” – that is, some of their production steps and therefore they develop new-luxury items which conventional
involve humans while other steps use normal mass production industry wisdom suggests won’t work. Outsiders also can see
technologies. The basic pattern or process does not change, but the gaps within an industry that the incumbents have
there will be slight variations allowing the customer to express automatically accepted without questioning. They come up
their individuality and personal style. “funny” ideas that will be scoffed at by industry insiders but are
Old luxury goods traded heavily on their elitism. New-luxury frequently loved by consumers.
goods are limited but not exclusive. New-luxury goods are
upmarket and more expensive, but still accessible. New-luxury is “The star of trading up is the American middle-market consumer.
all about expressing your shared values more than proving you For decades, demographers have loved these consumers
have money by buying the absolutely most expensive option because they were easy to identify and seemed quite predictable
available. in their behaviors. Companies counted on them, too, because
they had control over them and could tell them what to buy and
The business forces which have fueled the growth of new-luxury set prices as they wished. But the ‘average’ middle-market
goods include: consumer is disappearing. More and more the middle-market
n Changes in the dynamics of retailing – and the rise of consumer is a person who selectively trades up to new and
specialty retailers (Crate and Barrel, Williams-Sonoma, better products and services and trades down in others to pay for
Victoria’s Secret, Bed Bath & Beyond, etc.). These speciality the premium purchases. New-luxury consumers are so
retailers offer a limited selection of goods in a limited number knowledgeable, selective, affluent, and discerning that
of categories at premium prices. Consumers then end up businesses must listen and respond to them as never before.
shopping for the bulk of their purchases at low-cost mass And although the primary traders up are relatively affluent –
merchandisers (Wal-Mart and Costco) but flock to the earning $50,000 a year and above – the effects of new-luxury
speciality stores and pay a premium for goods in areas where goods spread benefits to people at all income levels. By
they want to trade up. America now has over 45,000 shopping polarizing the market, a new-luxury entry does not drive out
malls which fuel the increasing demand for new-luxury goods. low-cost goods; rather, it helps to ensure they are available. And
The trend now is towards even bigger malls that also the pressure from the most affluent consumers accelerates
incorporate entertainment features like multiplexes, rides, innovation at the high end which cascades downward to lower
themed events, live performances and many more elements priced products more rapidly than ever before.”
of “shoppertainment”. – Michael Silverstein and Neil Fiske
 Trading Up - Page 6

The eight key management practices Create a progressive ladder

4. 8 Practices 3
of successful new-luxury creators of genuine benefits.

New-luxury companies don’t try and fool their customers. They

New-luxury leaders follow a distinctive set of eight practices
don’t dress up an ordinary product and say that it is better. Nor do
which enable them to create premium products and services,
they make meaningless innovations, or try to get by on the
connect with customers, build their companies and establish or
strength of their brand image alone. Instead, new-luxury
maintain market leadership.
companies make technical improvements that produce
functional benefits which will result in emotional engagement for
customers.
Never underestimate the For example, Calloway Golf makes a Big Bertha driver which is
8 Practices 1
customer’s desire to trade up. 50-percent larger than a conventional driver but no heavier. (The
technical difference). The larger head of the Big Bertha makes it
In every new-luxury category, customers are different from the easier for a golfer to hit the ball further. (Improved functional
usual stereotypes. They’re more affluent, better educated and performance). As a result, golfers wax lyrical about how much
more sophisticated. In the categories which are important to their game improves when they use Calloway Golf clubs.
them personally, new-luxury customers become experts who (Emotional engagement).
appreciate all the finer points about the product. They will
To succeed, a new-luxury product must deliver at all three levels:
appreciate technological quality and innovation, the heritage of
technical, functional and emotional.
your brand and the advance of the category as a whole.
The flow-on effect of all that product knowledge is that customers Focus on innovation, quality and
get a good feel for what constitutes value. They can tell whether a 8 Practices 4
overall customer experience.
price is aligned with the value delivered and how that cost
matches their emotional needs and purchasing power. It’s
New-luxury leaders have to keep innovating aggressively to
almost as if consumers had an in-built calculator which tells them
keep commanding premium pricing. Unless they keep upping
when a new-luxury price point is too high and when the price
the ante, so to speak, the innovation cascade will catch them out.
point is too low and a bargain is there for the taking.
This occurs when whatever’s different and luxurious today
becomes part of the standard brand tomorrow. As competitors
Make major leaps, not
8 Practices 2 enter the market, they start delivering the same or better
incremental improvements.
technical and functional advantages. A new-luxury company has
to keep moving forward.
The traditional approach to business is to progressively find
In fact, the best new-luxury companies render their own products
ways to optimize corporate performance. New-luxury vendors
obsolete before someone else does it to them. They look for
don’t do this at all. Instead, they look for major leaps in
creative ways to shorten their product development cycle.
performance which will justify charging a big premium. They trust
New-luxury companies cannot afford to sit back and rest on their
that the customer will be able to factor in all those advances
laurels, or else they will get swamped by others.
when considering the price being asked. As a result of
deliberately going for higher prices and higher volume, For example, Calloway Golf had $364,000 in revenue in 1982.
new-luxury vendors can earn disproportionately large profits. Ely Calloway, the company’s founder, raised some investment
capital from the General Electric Pension Fund and started
For example, BMW is the most profitable car company in the
looking for ways to develop better golf clubs. Since he was an
world. With sales of just 213,127 vehicles in 2001, BMW earned
outsider to the golf industry, he wasn’t afraid to try some
$1.87 billion in profits. Compare that to General Motors which
manufacturing technology which was in common use in the
generated a profit of $600 million on the sale of more than four
aeromotive industry. Soon his company developed the Big
million vehicles in 2001. BMW produces premium or new-luxury
Bertha, and then followed it up with two more new drivers called
cars on the basis that they are engineered by people who love
the Great Big Bertha and the Biggest Big Bertha. As the
cars. BMW focuses on the technical and functional benefits of its
company grew, Calloway continued to spend more on research
cars in order to create an emotional engagement with
and development than most of its competitors.
customers. The company operates by very strict design
principles which require it to use the best components to make Calloway’s customers can even have a free custom fitting at the
substantial improvements with every new model. BMWs are Calloway headquarters. Customers spends two hours in a hitting
usually the most expensive cars in their product segments. The chamber having their swing measured and analyzed. The
company thrives because its customers love driving the cars, customer is then issued with detailed specifications of the right
and become almost fanatical about the company. kind of golf clubs to buy to take advantage of their personal
preferences. This information is then entered into a database
When a company gets everything right, new-luxury companies
which is used to establish the design parameters for the next
can achieve high growth even while maintaining premium
generation of clubs.
pricing. For conventional companies, this is a gravity defying
concept, but new-luxury manage to pull it off and to stay in that As a result of these innovations, Calloway’s revenues grew by at
sweet spot year-in and year-out. This is a pretty impressive proof least $100 million a year every year from 1991 to 1998. In 1992,
of the economic benefits of developing and commercializing a Calloway Golf went public achieving a peak market value of $2.5
successful new-luxury product or service. billion on sales of $849 million and an operating income of $214
million. The company’s creed is to be “demonstrably superior
and pleasingly different”.
 Trading Up - Page 7

Extend your brand both Use influence marketing

8 Practices 5 8 Practices 7
up-market and down-market. and brand evangelists.

Many new-luxury companies extend their brand at both ends of In most new-luxury product categories, there are a small core of
the price spectrum simultaneously. It’s not unusual for there to customers who generate a large proportion of sales and profits
be a fivefold to tenfold difference between the highest and lowest through their repeat purchases. For example, Victoria’s Secret
price points offered by a new-luxury vendor. This contrasts with has found the top 10-percent of customers generate half its sales
normal commercial practice where a company’s most expensive and profits. New-luxury companies focus intensively on these
product is usually only three or four times the price of its cheapest core customers.
product offering. As a result, most new-luxury products are launched differently
By having products positioned at both ends of the price from mass consumer products. Instead of an advertising blitz,
spectrum, new-luxury players create aspirational demand while many of these products involve carefully managed sales efforts
simultaneously making their products more accessible and to specific groups in specific venues. Word-of-mouth is then
competitive. They pull this off by creating and maintaining a enlisted to build buzz about the product. For example, when
distinct character for each product at every price level. The brand Calloway Golf released its Big Bertha driver, the company used
essence which all products share is then articulated and made endorsements from Jack Welch and Bill Gates as a way to
obvious. influence recreational golfers.
For example, both Mercedes-Benz’s high end Maybach 62 By continuing to focus intensively on these core customers and
which sells at $350,000 and its C230 sports coupe at $26,000 ideally turn them into fans of the brand, new-luxury companies
share the Mercedes brand theme – advanced engineering, also get early warning signals when the market is shifting. That
quality manufacture, flawless performance, solidity, safety and provides ideas and hints for next-generation variants, features
luxurious comfort. Each model interprets those themes in its own and products.
characteristic and genuine way.
Continually attack the
8 Practices 8
Customize your value chain to category like an outsider.
8 Practices 6
deliver the ladder of benefits.
New-luxury companies are always on the outlook for the next
New-luxury creators always find ways to work outside the breakthrough. They don’t think like industry incumbents,
established industry value chains in order to achieve economies by-and-large, because many new-luxury vendors are outsiders
of scale at small volumes. Typically, this involves placing more of themselves. Therefore, they continually look beyond their own
an emphasis on control and less on ownership of the value chain. categories for emerging trends and patterns.
In other words, new-luxury vendors tend to become masters of Where do new-luxury companies draw their inspiration? From
the value chain. old luxury products or services, from innovations from overseas
For example, the Boston Beer Company makes Samuel Adams (especially Europe or Asia), from advice provided by the experts
Boston Lager with the objective of making the best beer in or professionals or by importing ideas which have worked in
America. The company is now the largest specialty brewer with other product categories. It’s not unusual for new-luxury
sales of $250 million in 2002. Samuel Adams sells at price companies to have people carrying out worldwide scouting
premiums of roughly 100-percent over Budweiser, Miller Lite and expeditions for new ideas, and to form alliances with eclectic
Coors. Yet Boston Beer only controls what it identifies as the groups and organizations to instil some new thinking and original
most important elements of the value chain and contracts out ideas into the mix.
everything else. Boston Beer doesn’t attempt to grow its own Actually, the hard part comes when a new-luxury company
hops. Nor does the company build its own expensive production becomes highly successful. It then becomes easy for the
facilities, but works with selected brewers to use a specified company’s ideas and philosophy to become the new
process which combines aspects of 19th-century brewing with conventional wisdom for that industry. Many others will then try to
20th-century quality control methods. Boston Beer then handles follow the same business model. New-luxury companies know
labeling, packaging and distribution so that the beer can be in the this is dangerous, and force themselves to keep thinking and
consumer’s hands within one month of it being made in order to acting like mavericks
deliver peak flavor. Boston Beer was the first company in its
industry to mark its product with a sell-by date that consumers For example, Pleasant Rowland founded American Girl to make
can read and understand. dolls for girls, even though she had no experience whatsoever in
the industry. She decided to make premium dolls that would sell
Most new-luxury companies are very accomplished at at $84 each, $60 more than the typical Barbie doll. American Doll
orchestrating and controlling their value chains. This provides also uses a different design and construction process so its dolls
them with the confidence to be able to go up against the market last longer and generate an emotional engagement with girls.
leaders and win. It also allows them to command a pricing Within four years of the company being founded in 1986,
premium, and to back up those claims with more than mere American Girl had grown to over $77 million in sales. American
marketing hype. Every new-luxury vendor holds true to Girl has succeeded because it sees itself as providing girls with
standards of quality and detail which are uncommon in their an engaging and entertaining experience rather than simply as a
industries. They become almost fanatical about being doll maker and seller. The company has continued to grow by
demonstrably different and better. That, more than anything offering a continuous stream of new products supported by
else, is the hallmark of a new-luxury company. add-ons that build on the original product idea – something
nobody else in this industry has done.
 Trading Up - Page 8

So where will the new-luxury trend go from here? To take advantage of these opportunities and launch a
new-luxury business, you’ll need a three-step work plan:
“America has not finished trading up. The phenomenon is almost
infinitely extendable because the capacity of businesses to
innovate is unlimited and the emotional needs of consumers are 1 Vision 2 Translation 3 Execution
never entirely filled. So for entrepreneurs and business leaders,
the trading-up phenomenon represents a tremendous
1. Vision – You’ll need to come up with a product or service idea
opportunity – for business growth, increased brand and
that bridges the gap between mass and class. Perhaps this
company vitality, category leadership, and disproportionate
will involve breaking a compromise everyone else in the
share of profits. The list of categories waiting to be transformed –
industry just blindly accepts at present. Or you may start with
or transformed once again – is long indeed.”
a craft business and find a way to standardize the offering
– Michael Silverstein and Neil Fiske
enough so it will appeal to a broader range of middle-market
Some categories to watch include: consumers. You may even take an idea from one industry or
another country and apply it in a different context and a
n Premium tea – with new-luxury brands which have compelling
different setting. Regardless, you have to come up with some
stories built around the historical origins of tea.
product or service idea which will justify a premium price. You
n High-performance athletic wear – which will be comfortable need to know who you want to reach, how you want them to
while at the same time enhancing muscle support, thereby behave and how you’ll connect by the end of the vision
decreasing fatigue. phase.
n Service industries – financial, legal, educational, health care, 2. Translation – This is about putting together the technical and
child care, elderly care, pet care, real estate, travel and home functional benefits which will support your vision. Here you go
maintenance. All of these service industries have room for into articulating your concept in more detail, developing a
new-luxury brands to emerge. prototype, integrating input from expert users and planning
In addition, the same forces which have driven the trading up your value chain. Make certain you have scalability and the
phenomenon in the United States are also at work in markets ability to manufacture in high volume to meet demand.
around the world. Many international new-luxury brands will Organize your idea realistically and determine how you can
emerge in the immediate future. As other economies became produce your new-luxury product without compromising your
more consumer-driven, the internationalization of trading up will vision.
occur. This is already happening in the United Kingdom, in 3. Execution – This is where you take your new-luxury product
France, in Japan and elsewhere. Yet this is just the beginning, or service to market. Typically this will involve test marketing,
and many more new-luxury brands will become established and a public launch, production ramp up and efforts to continue
flourish. building the brand. You have to bring the right talent on board
The spread of trading up will be driven by: and find ways to leverage the input of experts who will help
n Increasing globalization – as China and other Asian countries you refine your early versions. It’s also when you start
grow. Consumers will look for localized versions of new-luxury building buzz among your target users. This is the stage
products that have done well in the United States. At the same where you ensure that you’re actually following the eight
time, more businesses will have access to supply chains in practices of successful new-luxury companies.
other countries enabling them to lower costs still further. “Trading up poses a threat to many businesses. The entry of
n The heightened role of the Web and e-commerce – meaning new-luxury goods generally leads to polarization in its category.
new-luxury creators will be able to tap into larger markets for Consumers gravitate toward the premium new-luxury goods if
their products than just those provided by their local markets. that category is important to them. If it isn’t, they trade down to
Many new-luxury purchasers have Internet access and this is low-cost goods. That can often lead to death in the middle for
an increasingly important sales channel. those brands and products that offer no specific reason to buy: a
n The increasing influence in society of solo females – because significant price and cost advantage, a genuine technical or
they are particularly active buyers of new-luxury products. As functional difference, or an emotional benefit. Managers of
more people delay getting married and as the divorce rate conventional businesses that are threatened with death in the
increases, the pool of solo working females in most countries middle often protest, ‘ We can’t create a premium product in our
is increasing rapidly. category. There’s no volume at the high end!’ Or, ‘Our product is
a commodity – there are no real differences. We can’t create
n The general aging of the population – because seniors are
emotionally satisfying goods.’ But there are emotional issues
also active new-luxury buyers. Seniors love spending on their
lurking in every product category, and where there is emotion
children and grandchildren and this is a major driving force
and a product difference, there can be volume and profits.
behind many new-luxury products.
New-luxury goods have transformed many categories and they
n Next-generation consumers are becoming smarter shoppers will likely do the same in dozens of others that currently lack a
– because they have grown up with the Internet. They’re brand that offers quality, technical difference, functional
comfortable with brands and products that appeal to them superiority, and genuine emotional satisfaction. The results of
emotionally. They want to travel, learn and experience things. our survey show, in fact, that there are many categories that
They have little patience for things which are poorly made, consumers say are emotionally important to them, but in which
and know how to tell their friends what’s good and what should they currently have few options for trading up.”
be avoided in all sorts of product categories. – Michael Silverstein and Neil Fiske