The Consumer's Hierarchy of Preferences: Two Ends of the Strategy Spectrum

The Consumer's Hierarchy of Preferences: Two Ends of the Strategy Spectrum

In the world of retail, there are two main strategies that companies employ to attract consumers and build their brand. These strategies are at opposite ends of the spectrum, but both have the potential to create a positive impact on the consumer's hierarchy of preferences.

The first strategy is commonly employed by retailers who want to build a brand that allows them to charge a premium for their products. They do this by creating a "positive valence" towards their brand, which is essentially a good feeling that consumers have towards a product without consciously realizing it. This is achieved through the principle of association in advertising. By placing their brand next to things that consumers feel good about, such as happiness or prosperity, the positive feeling gets transferred to the brand itself.

Take the example of Coca-Cola, which has successfully made its soft drink an icon of American culture and happiness through relentless advertising. By inundating consumers with ads of smiling people holding their soft drink, Coca-Cola has created a feeling that goes beyond just a sugary beverage. When consumers buy a Coca-Cola, they are buying into a feeling that identically-tasting private label products cannot replicate.

On the other hand, the second strategy focuses on increasing volumes rather than price. Retailers employing this strategy aim to decrease costs as much as possible in order to pass on the savings to consumers and stimulate demand. The goal is to achieve greater economies of scale, which further reduces costs.

These retailers prioritize cost efficiency and position their brand in terms of consumer value. Their competitive advantage lies in offering low prices, which is often stated in their brand motto. Think of retailers like Ross with its "Dress for Less" slogan, TJ Maxx's "Get the Max for the Minimum," or Target's "Expect More. Pay Less." These companies aim to meet more conditions on the consumer's hierarchy of preferences, going beyond what is necessary for a satisfactory purchase. By doing so, they effectively increase consumer surplus and create loyal customers with a unique value proposition that is difficult for competitors to imitate.

It is crucial for retailers to fill more higher-level items on the consumer's hierarchy of preferences in order to create a stronger bond with customers. This goes beyond simply meeting expectations; it requires aligning all aspects of the business operations with the brand's value proposition. A successful example of this is Costco, which intentionally keeps its oversized hot dog and soda combo priced at $1.50. This communicates the value that customers can expect to receive at Costco. Consistency is key in building a brand that resonates with consumers.

However, companies must be wary of brand dilution. Coach, for instance, was once a high-end brand, but their decision to introduce lower-priced products and distribute them through outlet channels quickly degraded their luxury image. This serves as a reminder that avoiding brand dilution is critical, as rebuilding a brand's reputation can be a challenging task.

When it comes to extracting consumer surplus, there is a fine line that companies must tread. Some private equity firms have historically focused on extracting this surplus by raising prices and cutting services that were not valued. While this may lead to short-term profit increases, it comes at the cost of lower expected company longevity. Leaving some consumer surplus in reserve allows retailers to maintain a better competitive position. By doing so, they can provide value to customers while still remaining profitable.

In conclusion, the two retail strategies of low margins with high volume and high margins with low volumes offer different value propositions but can both create consumer surplus. Understanding the consumer's hierarchy of preferences and aligning business operations with the brand's value proposition are crucial for building a loyal customer base. Three actionable pieces of advice for retailers are:

1. Focus on creating a positive valence towards your brand by associating it with things that consumers feel good about.
2. Prioritize cost efficiency and offer consumer value to stimulate demand and create customer loyalty.
3. Avoid brand dilution by maintaining consistency in business operations and aligning them with the brand's value prop.

By implementing these strategies, retailers can successfully navigate the spectrum of consumer preferences and create a strong and lasting relationship with their target audience.