Mass Affluence Are Americans living beyond their means in pursuit of luxury ? or has luxury simply become affordable enough for people to enjoy without breaking their budgets?
Among the observers who are chronicling America’s new affluence are Dinesh D’Souza and Michael Silverstein.
D’Souza is a research scholar at the American Enterprise Institute and the author of The Virtue of Prosperity: Finding Values in an Age of Techno-Affluence. D’Souza notes that, “In 1980, the vast majority of Americans earned less than $55,000 a year. If you made $55,000 that year, you were in the top 5 percent of income-earners. Adjusting for inflation, $55,000 in 1980 equals $75,000 today. But if you want to be in the top 5 percent now, you need to make at least $150,000. Or consider net worth. In 1980, about a million U.S. families had a net worth of $1 million or more. Today, the number of millionaire households in this country exceeds 5 million.”
And even those who are not millionaires have enjoyed a higher standard of living. The Federal Reserve Board reports that over the past 20 years, the median real wealth of Americans has increased by 25 percent. And U.S. consumers’ spending on luxury goods is growing four times faster than their total spending.
As D’Souza asserts, “These statistics reflect the fact that millions of Americans have reached a standard of living that, in the words of novelist Tom Wolfe, would ‘make the Sun King blink.’ Indeed, the United States has created the first mass affluent class in world history.”
More evidence of Americans’ affluence is presented by Silverstein, a senior vice president of The Boston Consulting Group and the co-author (with Neil Fiske) of Trading Up: The New American Luxury.
As he explains, “American households have more discretionary wealth available to be spent on premium goods than ever before. Real household income has risen for all Americans over the past 30 years, and it has risen fastest for the highest earners. Income for the top fifth or quintile ? defined as households earning over $82,000 ? has risen nearly 70 percent in real terms.
“As a result, those 21 million affluent households control nearly 60 percent of the nation’s discretionary purchasing power. Home ownership has also contributed to Americans’ increased wealth. Homeowners, on average, have $50,000 worth of equity in their homes, and the entire pool of U.S. home equity is $7 trillion.”
At the same time, several other trends have converged to create this unprecedented mass upper class. Record-low interest rates drove a refinancing boom that allowed millions of Americans to lower their mortgage payments and increase their discretionary wealth. The generational cycle we’ve examined several times in Trends is also responsible: Baby boomers have reached their peak earning power. And advances in health care and medicine have kept the Boomers healthy, active, and eager to spend.
It’s easy to overlook another source of increased wealth for U.S. consumers: benign deflation. Globalization, technological advances, and streamlined processes have reduced production costs. The rise of discount retailers like Wal-Mart and Costco has brought tremendous savings on everyday items at “everyday low prices.” With their economies of scale and advances in inventory management, these superstores can pass along significant savings to shoppers, reducing the cost of living on basic goods. Silverstein’s research suggests that in 2001 alone, consumers’ savings on basic goods amounted to $100 billion, all of which was freed up for spending on premium products.
As the purchasing power and wealth of Americans spiral upward, at least the upper portion of the vast middle class of the U.S. is turning into a large upper class. They have more wealth, and they enjoy more luxuries than any other generation in history, and they are obsessed with acquiring even more products and services, as well as bigger homes.
In neighborhoods across the nation, wealthy Americans, fueled by supersized incomes and rock-bottom interest rates, and inspired by visions of living like Donald Trump or Bill Gates, are tearing down modest ranch houses and building brick mansions. The size of the average new home in the U.S. has grown by 130 percent in just two generations, swelling from 1,000 square feet in 1950 to 2,265 square feet in 2000.
And American consumers’ spending for products and services for their homes is also surging, from $67 billion in 1970 to $160 billion in 2001. Not content with television sets, they’re installing home theater systems, with plush theater chairs, high-definition plasma screens, and all the latest gadgets. In the master bathroom, Jacuzzis and steam showers are no longer considered luxuries; they’re standard equipment in many new homes. In the kitchen, middle-class homeowners have granite counters, restaurant-grade ranges, and Sub-Zero refrigerators.
And when they dream of more luxuries, they’re often sleeping on expensive mattresses. One in every five mattresses sold in the U.S. in 2003 cost $1,000 or more, according to the International Sleep Products Association. That’s a 33 percent increase in the proportion of high-end mattresses sold in just three years.
As the Web site CNN/Money reports, the ultra-luxury segment of the market ? mattresses priced between $5,000 and $20,000 ? seems to be growing even faster. “The Baby Boomers are getting older, and more affluent,” the association’s spokesperson told CNN. “As you get older, your body changes and those aches and pains develop. So they have the money and the inclination to upgrade.”
There’s a growing demand for hand-assembled mattresses made of silk, cashmere, and lamb’s wool, with springs tied by hand to ensure just the right tension according to each customer’s size and preferences. The top models are Hastens and Duxiana, which are made in Sweden, and VI-Spring and Hypnos from Great Britain. These companies make the mattresses for royalty, for passengers of the Queen Mary II luxury liner, and for customers willing to pay top dollar.
Spending on children has also exploded, as today’s kids, from toddlers to teenagers, now travel with Gameboys and portable CD players, while watching DVDs in their parents’ luxury SUVs. A “simple” vacation with children no longer consists of a $39 a night motel with a pool and a TV; instead, families stay in hotels with water parks and $500 a night suites equipped with all the comforts of home.
The phenomenon we’re describing is known as “trading up” among experts on consumer behavior. Middle-class consumers who splurge on luxury items, such as a latte that costs $5, a face cream that costs $25 an ounce, or a dog bed that costs $600, are seeking the emotional lift that comes from rewarding themselves or those they love.
One expert who has been monitoring this behavior is James Twitchell, the author of Living It Up: America’s Love Affair with Luxury. “One way to look at it is, consumers are idiots,” he says. “Another way to look at it is that we’re quite rational.... The reason these seemingly ridiculous products . . . command the prices they do is that when we get near them, we feel powerful feelings.”
A case in point is Kristin Dormeyer, a public relations executive who routinely spends $40 on gourmet dog treats for her greyhound. As she told the St. Louis Post-Dispatch recently, “It’s the products I have an emotional connection to that I don’t mind paying more for. . . . It makes all the hard work feel like it’s worth something on a personal level.” She compensates by following a thrifty approach to other purchases. Dormeyer waits for grocery items like breakfast cereal to go on sale before buying them, and uses coupons to get discounts on items like detergent.
Michael Silverstein believes that high-end products fill a void in people’s high-stress lives. As he points out, “Consumers live today under pressure in terms of time, job performance, and family. They have turned to goods...to help them feel better.”
Among the businesses that cater to the demand for luxury are: Nordstrom in upscale clothes, Panera Bread in casual dining, Williams-Sonoma in high-quality kitchen accessories, and Callaway Golf in advanced golf clubs.
Silverstein and his co-author Neil Fiske, the CEO of Bed, Bath, & Beyond, surveyed 2,300 consumers and interviewed hundreds more. Through their research, they discovered that people trade up to satisfy their need for four “emotional spaces.”
The first emotional need is called taking care of me. Feeling that they work too hard and don’t have enough time to enjoy their lives, Americans are willing to treat themselves by splurging on a shampoo that costs $12 instead of one that costs $2. Buying expensive cosmetics, kitchen items, home electronics, linens, or spa treatments gives people a way to reward themselves for hard work, or to comfort themselves after a setback, such as a failed relationship.
The second emotional need, connecting, is the emotional drive to form tighter bonds with one’s family, friends, co-workers, and significant others. People meet this need by buying home theater systems, expensive pet food, and jewelry.
The third need, known as questing, is the longing to try new experiences, sample new foods, and broaden one’s horizons. Consumers indulge in expensive vacations, cars, computers, and four-star restaurants to satisfy this need
Finally, the fourth emotional need expressed through trading up is for individual style. Spending in this category is motivated by the desire to show other people that one has unique tastes and doesn’t just follow the crowd. Examples include distinctive watches, clothes, imported beers, and luxury cars.
According to Silverstein and Fiske, the products that consumers buy to meet the four emotional needs are different than the goods we would once have defined as “luxury products.” Unlike those “old-luxury” offerings, which were sold in small quantities only to wealthy customers, today’s marketers are selling the “new-luxury” products to a wide audience.
Silverstein and Fiske analyzed the most successful New Luxury goods in more than 30 categories and found that they are all marketed in three basic types. In each category, the products are priced higher than mainstream goods, but they are affordable enough for middle-class customers to buy. Let’s explore each of these three types:
To market goods in the first type of product, accessible super-premium, the company prices its brand as the most expensive in the category. However, because the category is relatively inexpensive, the high price is still within the reach of a middle-class consumer. One example is Belvedere Vodka, which costs about $28. Though most people could easily afford to buy Belvedere, it commands an 88 percent premium compared to Absolut Vodka.
With the second product type, old-luxury brand extension, marketers offer lower-priced versions of their established high-end products. Consider Mercedes, which has built its reputation for quality and prestige on “old-luxury” cars priced up to $300,000 and above for the Maybach model. The company also sells a “New Luxury” model, the C-class coupe, for roughly $26,000, which is accessible to many more consumers who are looking to trade up to a Mercedes.
The third product type is called masstige, short for “mass prestige.” Companies that sell this type of product aim for the “sweet spot” between mass and class ? they target the mass market with premium-priced items. For example, Bath & Body Works body lotion is priced at $1.13 per ounce, compared to Vaseline Intensive Care, at 30 cents per ounce. It is not the most expensive lotion, however, as some products like Kiehl’s Creme de Corps sell for $3.00 per ounce.
As Americans’ wealth continues to grow, and their desire to trade up continues, it is clear that executives of businesses of all types will need to confront this trend. Not long ago, only a few niche companies could afford to target millionaires; there simply weren’t enough wealthy consumers to go around. Now that there are 5 million millionaires in America, and an entire “mass upper class” of consumers with money to burn, it would be foolish to overlook this lucrative opportunity.
Looking forward, we predictthat companies in most consumer categories will have to evolve their business models to address the growing demand for “New Luxury.” We forecast that they will have to choose one of the following three strategic positionings:
First, some companies will succeed by becoming the low-cost leaders in their industries. Recall that Wal-Mart and Costco have enabled consumers to trade up to New Luxury goods by lowering the costs of everyday retail items. There will always be a strong demand for routine products and services at cheap prices, whether the customers are individual consumers or other businesses.
Second, some companies will win big profits by emerging as the New Luxury leaders in their product categories. According to research by Silverstein and Fiske, the companies that are becoming New Luxury leaders today are using eight rules for success:
They never underestimate their customers. They believe that consumers are smart enough and rich enough to trade up to better products at premium prices.
They shatter the price-volume demand curve. Instead of offering small improvements at incremental price increases, New Luxury leaders introduce a quantum leap in quality, at a much higher price, and they earn greater profits as a result.
They create a ladder of genuine benefits. Rather than offering line extensions that customers don’t want, they make real improvements to products that lead to real value for customers.
They escalate innovation, elevate quality, and deliver a flawless experience. They understand that today’s luxury is tomorrow’s commodity, so they keep raising the bar.
They extend the price range and positioning of the brand. New Luxury leaders often set the highest price in their product line at 10 times their lowest price. In this way, they appeal to customers who want the best at the highest price, while also creating a more accessible entry-level product like the “under $30,000” Mercedes model.
They customize their value chains to deliver on the benefit ladder. That is, they control the most important parts of the value chain and outsource the parts that others can do less expensively. For example, the brewer of Samuel Adams premium beer creates the recipe for its lager, but it buys hops rather than growing them.
They use influence marketing and seed their success through “brand apostles.” Studies show that the most loyal 10 percent of customers create up to 50 percent of a brand’s profits and influence the purchases of other consumers.
They continually attack the category like an outsider. Once they become the market leader, they never stop thinking of ways to change the category to their advantage.
The third strategic position will have the rest of the companies stuck in the middle ? with tragic consequences. Profits will go to businesses that can cost-effectively satisfy the demand either down-market, for the cheapest commodity goods, or up-market, for the most unique New Luxury products and services. The outlook is not good for firms that can offer neither the lowest price nor the best quality. Companies in this predicament will face three options:
They can strive to cut their costs through reengineering, outsourcing, or applying information technology so they can compete at the low end.
They can try to innovate to improve the value of their offering by making something that is better, smaller, bigger, faster, smarter, sleeker, or more advanced than anything else at the high end of the market.
They can aim for the “sweet spot” we discussed earlier, by using the “masstige approach” that works for Bath & Body Works. Companies must try to find the delicate balance between “mass” and “class” by offering a premium-priced product that is still priced low enough to appeal to a mass audience.
References List :
1. The Virtue of Prosperity: Finding Values in an Age of Techno-Affluence by Dinesh D’Souza is published by Free Press Publishing. ⓒ Copyright 2001 by Dinesh D’Souza. All rights reserved.2. USA Today, December 11, 2000, "Celebrate, Don’t Mourn, Nation’s Mass Affluence," By Dinesh D’Souza. ⓒ Copyright 2000 by Gannett Co., Inc. All rights reserved.3. Trading Up: The New American Luxury by Michael J. Silverstein and Neil Fiske is published by Portfolio Publishing. ⓒ Copyright 2003 The Boston Consulting Group. All rights reserved.4. To access the report "A Bedtime Story for $20,000," visit the CNN/Money website at:www.money.cnn.com/2004/05/12/pf/goodlife/beds5. Living It Up: America’s Love Affair with Luxury by James Twitchell is published by Columbia University Press. ⓒ Copyright 2002 by James Twitchell. All rights reserved.6. St. Louis Dispatch, April 4, 2004, "Trading Up; The New Pursuit of Happiness," by Allyce Bess. ⓒ Copyright 2004 by St. Louis Post-Dispatch L.L.C. All rights reserved.
