Product Mix Strategy: Think Luxury

If the recent recession nearly buried your company, you might want to look at your product mix strategy.

Think: Luxury.

Despite the economic collapse, sales of luxury goods remained steady.

The number of affluent Americans (households with $100,000 annual income or more) continues to grow, up 75% in this past decade.  Fourteen percent of Americans earned $100,000 or more in 2001 compared to just nine percent in 1990. Today, the number is approaching 20 percent.

Smart marketers have taken note.  While the primary purchasers of luxury goods (think Armani) and services (think at-home avocado wrap) remain the truly rich, several companies have taken ordinary items and super-riched them successfully (think $6 Starbucks mocha cappuccino).

Many luxury brand names have begun offering affordable models, an effort to present wealthy wannabees with less pricey alternatives.  Land Rover’s Discovery, Hummer’s H2, and Jaguar’s X-type sedan come to mind.  Upscale kitchen appliance maker, Viking Range Corporation, has expanded its product line to include cookware and cutlery at affordable price points.

How to Recession-Proof your Company

Historically, luxury goods weather the dips in the economy better than mainstream goods.  In uncertain economic times, consumers face financial – and often emotional – stress.

And while they may modify their expectations (put off the purchase of a new car or second home), they don’t change their fundamental behavior.  The small indulgences that got them through the day (the ice cream cone, the gourmet cookies) before the recession will still be the small indulgences that get them through the day after the recession and into recovery.

So how do you adapt your product mix strategy to include luxury buyers?

Simply raising prices, of course, could cost you customers.  But a quality product with a quality reputation will continue to be in demand despite hard times.  If your firm offers a broad range of products or services, offering several in a luxury category will help blunt the effects of a poor economy.

Luxury isn’t just for consumers, either. It’s a strategy that works for B2B companies, too.

Case Study #1

When Christian Kerhin founded his own internet technology service firm, Attivotech, he was determined to prepare better for downturns in the economy than his former employer, who had been forced to lay off dozens during the last recession.

“Even if the economy is hurting, companies still need IT,” says Kerhin, “They may have to lay off employees, but they can’t do without their computer systems.”

Attivotech seeks only well-heeled clients, providing standard service contracts, and “Gold” level and “Platinum” level agreements. Gold clients get unlimited remote tech support in addition to their standard system updates, security patches, and cloud-based backup. Platinum clients further receive unlimited onsite tech support and a maximum of one-hour response time.

“Those are the clients who will pay whatever it takes to keep their systems operating,” says Kerhin, “We jump through hoops, and gladly, for our Platinum clients. They’re the ones who keep us in business no matter what the economy is doing.”

Case Study #2

Just as sales of new cars slows to a standstill during a recession while used cars and auto parts makers thrive, sales of complete systems can meet the “luxury” definition of recession proof.

For instance, Infratrol, Inc., a Wisconsin-based maker of industrial ovens and powder coating equipment, adapted a “systems” approach before the last recession.

“Rather than simply selling a single piece of equipment, we sold complete systems,” says president, Steve Onsager. “When the last recession closed the doors of many of our competitors, we were busy filling out the systems – selling parts and accessories – to keep our customers operating.”

Those customers that can afford the luxury of complete systems, rather than an a la carte approach, are targeted.

“We knew a recession was imminent,” says Onsager. “Selling systems helped us prepare for the worst.”

Case Study #3

One classic study published in the Journal of Marketing Research was Williams-Sonoma’s online catalog pricing experiment. The company had a $275 bread maker that almost no one was buying. When they positioned a similar bread maker for $429 and placed it next to the $275 bread maker, sales of the $275 bread maker nearly doubled.

In this case, the goal was not to sell the more expensive product – although that would be a plus – but rather to make the price of the first product look inexpensive so consumers buy more of those.

Lead with the most expensive product. Known as price anchoring, it sets the buyers’ expectations for what follows. If the first price they see is very expensive, then they may be more inclined to buy the less expensive-priced item that follows.

Who Will Buy?

Preparing for a recession is best done during a robust economy.  Developing and introducing systems, new products or a luxury line during a recession is risky.  Consumers are more cautious, and skeptical.

Now, when the economy is improving, is the best time to begin developing your luxury lines. A strong economy, however, does not guarantee success.  Understanding the motivations of luxury buyers is crucial.

According to research conducted at SRI-BI, a Menlo Park, California marketing research firm, three distinct motivations fuel luxury spending:

1. Luxury is Functional

Customer buys it because it’s of better quality – it lasts longer, has more bells and whistles, or is more dependable.

These are the older, wealthier consumers who are in their peak earning years, empty nesters with large disposable incomes.  They want things of enduring value, built to last (“like the good old days”).  They make logical rather than emotional or impulsive decisions when they make a purchase.

To reach them, use print.  They’re skeptical of television, even more so of the internet.  Use lots of facts in your ads.  Information-intensive messages work best with this group.

2. Luxury is Reward

They buy luxury goods as status symbols, to satisfy ego, a way to say, “I’ve made it.”

These are younger, often “new rich,” who buy conspicuous luxuries.  They are making a statement about who they are, their level of importance.  Brands with widespread recognition work well with this group.

To reach them, use both print and television.  Make “prestige” or “exclusivity”the primary benefits.

3. Luxury is Indulgence

Buyers willing to pay a premium in order to express their individuality and make others take notice.

More male than female, these consumers are younger and frequently come from wealthy families.  They enjoy the luxuries for the way they make them feel.

Far more likely to make impulse purchases, they respond well to emotional messages.  Use ads that promote the unique qualities of a product.

While the over-55 group can most afford it (and make up the largest portion of the “Luxury is Functional” group), it is the Gen X and Gen Y groups who seem to desire the lap of luxury most.  Interestingly, the “Me Generation” of Baby Boomers is most likely to find luxury items “wasteful” or “unnecessary.”

Understanding the luxury market, their buying motivations and lifestyles, will help you sell your whole line of products.

Having at least one group of luxury products can create an image of quality for your company.  It can also help maintain your profitability during lean times.

How could you add an element of luxury to your product mix? Which of the three types of luxury do you think you might try?