The Consumer's Hierarchy of Preferences: Strategies for Building Brands and Increasing Volumes

The Consumer's Hierarchy of Preferences: Strategies for Building Brands and Increasing Volumes

In the ever-evolving world of retail, companies employ different strategies to attract and retain customers. Two common approaches are focused on building a brand to charge a premium and increasing volumes by offering competitive prices. These strategies may seem contradictory, but they both aim to create consumer surplus and secure a competitive position in the market.

The first strategy, often used by retailers looking to establish a strong brand, involves creating a "positive valence" towards a product. Positive valence refers to the subconscious good feeling consumers have towards a particular brand or product. Retailers achieve this by associating their brand with positive experiences or emotions. A prime example is Coca-Cola, which has successfully positioned its soft drink as an icon of American culture, prosperity, and happiness. Through extensive advertising campaigns featuring smiling individuals enjoying their product, Coca-Cola has ingrained a sense of positivity and satisfaction associated with their brand. This strategy goes beyond selling a simple carbonated beverage; it sells a feeling that cannot be replicated by identical private label products.

On the other end of the spectrum, retailers focused on increasing volumes prioritize cost efficiency. They aim to decrease costs and pass on the savings to consumers, thereby stimulating demand and benefiting from economies of scale. These retailers often emphasize consumer value and low prices in their branding. Companies like Ross, TJ Maxx, and Target have successfully positioned themselves as value-driven options for consumers. By meeting more conditions on the Consumer's Hierarchy of Preferences, these retailers create loyal customers who appreciate their unique value proposition, setting themselves apart from competitors.

While conforming to consumer expectations is important, consistency with the brand's value proposition is even more crucial. Costco is a prime example of a retailer that ensures every aspect of its operations aligns with its brand. The company deliberately maintains its oversized hot dog and soda combo priced at $1.50. This low price serves as a signal of the value customers can expect from Costco. Consistency is key, as any deviation can lead to brand dilution and a loss of customer trust. Coach, once a high-end brand, experienced this firsthand when it started introducing lower-priced products and distributing them through outlet channels. This dilution of their luxury brand resulted in the inability to sell their higher-priced line of bags. Rebuilding a brand after dilution is challenging, making it crucial to avoid such pitfalls.

Creating consumer surplus is essential for retailers. Consumer surplus refers to the value that consumers receive beyond their expectations. Extracting this surplus can lead to short-term profit gains but may compromise the brand's longevity. Private equity companies, for example, have historically extracted consumer surplus by raising prices and cutting services that were not valued. While this may be profitable in the short term, it often comes at the expense of long-term customer loyalty. Leaving some consumer surplus intact allows retailers to maintain a competitive edge and secure a better position in the market.

In conclusion, retailers employ different strategies to build their brands and attract customers. Whether focusing on creating positive valence or offering competitive prices, both strategies aim to create consumer surplus and establish a unique value proposition. To succeed, retailers must ensure consistency with their brand's value proposition and avoid dilution. Leaving some consumer surplus intact can provide a competitive advantage and contribute to long-term success.

Actionable Advice:

1. Understand your target audience and their preferences. Tailor your brand strategy to create a positive valence that resonates with them on an emotional level.
2. Prioritize consistency in every aspect of your business operations. Ensure that every customer touchpoint reflects your brand's value proposition and reinforces the unique experience you offer.
3. Continuously analyze and adapt your pricing strategy. Strive to strike a balance between extracting consumer surplus and remaining competitive in the market. Leaving some surplus intact can help you maintain customer loyalty and a strong competitive position.