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 create a unique value proposition. These strategies can be seen as two ends of a spectrum, each with its own approach and goals. Understanding these strategies and how they connect to the consumer's hierarchy of preferences is crucial for businesses to effectively build their brand and create loyal customers.

The first strategy is commonly employed by retailers who want to build a brand that can charge a premium for their products. These retailers focus on creating a "positive valence" towards their products, which refers to a subconscious "good feeling" that consumers have towards a particular brand. This positive valence is usually not consciously noticed, but it plays a significant role in influencing consumer behavior.

To create this positive valence, retailers use the principle of association in their advertising. They strategically position their brand next to things that consumers already feel good about, such as happiness or prosperity. A classic example of this strategy is Coca-Cola, which has successfully made its soft drink an icon of American culture and happiness. By inundating consumers with ads of smiling people holding their soft drink, Coca-Cola has not only created a positive valence towards their product but also a feeling that identifies with the brand itself.

On the other end of the strategy spectrum, we have retailers who focus on increasing volumes rather than price. These retailers aim to decrease costs as much as possible, allowing them to pass on the cost savings to consumers and spur more demand. This increase in demand leads to greater economies of scale, further decreasing costs and allowing for even lower prices. These retailers position their brand in terms of consumer value, often emphasizing their competitive advantage of low prices.

Companies that effectively meet multiple conditions on the consumer's hierarchy of preferences increase the consumer surplus. The consumer surplus refers to the additional value that consumers receive beyond their expectations when purchasing a product. By exceeding consumer expectations and filling more higher-level items on the hierarchy of preferences, retailers create loyal customers who see a unique value proposition that cannot be easily replicated by competitors.

One example of a company that understands the importance of meeting consumer preferences and creating a consistent value proposition is Costco. Costco intentionally keeps its oversized hot dog and soda combo at $1.50 as a signal of the value customers can expect to receive at their stores. This consistent pricing strategy aligns with their brand and helps to build customer loyalty.

However, it's crucial for companies to avoid brand dilution, as it can be challenging to regain a once-established brand image. Coach, a luxury brand known for its high-end products, made the mistake of rolling out lower-priced products and selling them through outlet channels. This quickly degraded their luxury brand image, and they struggled to sell their higher-priced line of bags. Avoiding brand dilution is critical for maintaining a strong brand identity and ensuring long-term success.

In the world of retail, businesses can choose to exploit the consumer surplus to increase short-term profits, but this often comes at the cost of lower expected company longevity. Private equity companies, for example, have historically extracted consumer surplus by raising prices and cutting services that were not valued. While this may lead to short-term gains, it can harm the competitive position of the retailer in the long run.

Leaving some consumer surplus instead of extracting it all allows retailers to be in a better competitive position. By providing additional value to consumers beyond their expectations, companies can build a strong brand and create loyal customers who are willing to pay a premium for their products or services.

In conclusion, understanding the consumer's hierarchy of preferences and employing the right strategy is crucial for retailers to build a successful brand and create loyal customers. By creating a positive valence towards their products or focusing on increasing volumes with low prices, retailers can effectively meet consumer preferences and increase the consumer surplus. To achieve this, companies must ensure that their business operations reflect a consistent value proposition that aligns with their branding. Here are three actionable advice for retailers:

1. Understand the consumer's hierarchy of preferences: Take the time to understand what factors influence consumer decision-making and how your brand can align with these preferences. By meeting multiple conditions on the hierarchy, you can create a unique value proposition that sets your brand apart.

2. Avoid brand dilution: Be mindful of the impact that diluting your brand image can have on consumer perception. Stay true to your brand's identity and consistently deliver on the value proposition that you have established.

3. Leave some consumer surplus: Instead of extracting all of the consumer surplus for short-term gains, consider leaving some for the benefit of your customers. By providing additional value beyond their expectations, you can build customer loyalty and maintain a competitive position in the market.

By implementing these strategies and understanding the consumer's hierarchy of preferences, retailers can create a strong brand that resonates with consumers and ultimately leads to long-term success.