The Consumer's Hierarchy of Preferences: Creating Consumer Surplus

The Consumer's Hierarchy of Preferences: Creating Consumer Surplus

Introduction:
In the world of retail, there are two ends of the strategy spectrum that retailers employ to attract and retain customers. One strategy focuses on building a brand that can charge a premium, while the other strategy aims to increase volumes by offering low prices. These strategies may seem contradictory, but they both have one thing in common - they create consumer surplus. In this article, we will explore the concept of consumer surplus and how retailers can leverage it to their advantage.

Building a Brand: Creating Positive Valence
The first strategy employed by retailers is to build a brand that evokes positive feelings in consumers. This is achieved through "association," a key principle of advertising. By aligning their brand with things that consumers feel good about, retailers can transfer those positive feelings to their products. A classic example is Coca-Cola, which made their soft drink an icon of American culture, prosperity, and happiness through advertisements featuring smiling people enjoying their product. When consumers buy Coca-Cola, they not only get a refreshing drink but also a feeling of joy and contentment that private label products cannot replicate.

Increasing Volumes: The Power of Low Prices
On the other end of the spectrum, some retailers focus on increasing volumes rather than charging high prices. They aim to decrease costs as much as possible, passing on the savings to consumers to stimulate demand. These retailers prioritize cost efficiency and position their brand in terms of consumer value. They often highlight their low prices as their biggest competitive advantage. Stores like Ross, TJ Maxx, and Target have successfully adopted this strategy, attracting price-conscious consumers with their slogans that promise more for less.

Meeting Consumer Preferences: Creating Loyalty
To create loyal customers with a unique value proposition, retailers must meet more conditions on the Consumer's Hierarchy of Preferences. By going beyond the point where consumers would have already made a satisfactory purchase, retailers can increase consumer surplus. This means fulfilling higher-level items on the hierarchy, offering additional benefits or experiences that competitors cannot easily replicate. Costco, for example, deliberately keeps its oversized hot dog and soda combo at $1.50 as a signal of the value customers can expect from the store. Consistency is key in ensuring that a retailer's business operations align with their brand and value proposition.

Avoiding Brand Dilution: Building Longevity
Brand dilution can be detrimental to a retailer's success. When a brand begins offering products at lower price points or pushes products through outlet channels, it risks degrading its luxury image. Coach, once a high-end brand, faced this challenge when it introduced diffusion lines and sold its products in outlets. This strategy quickly eroded the perception of exclusivity, making it difficult for Coach to sell its higher-priced items. Avoiding brand dilution is crucial as rebuilding a brand's reputation can be a challenging and costly endeavor.

Leveraging Consumer Surplus: Actionable Advice

1. Understand Your Target Market: To effectively leverage consumer surplus, retailers must understand their target market's preferences and desires. Conduct market research, analyze consumer behavior, and identify opportunities to fulfill unmet needs.

2. Consistency is Key: Ensure that every aspect of your business operations aligns with your brand and value proposition. Consistency builds trust and reinforces the positive valence associated with your brand.

3. Leave Room for Competitive Advantage: Instead of extracting all consumer surplus, consider leaving some on the table. This allows you to be in a better competitive position and provides flexibility to adapt to changing market conditions.

Conclusion:
Understanding and leveraging the Consumer's Hierarchy of Preferences is crucial for retailers seeking to create consumer surplus. Whether through building a brand that evokes positive valence or offering low prices to increase volumes, both strategies have the potential to attract and retain customers. By meeting consumer preferences and avoiding brand dilution, retailers can create a unique value proposition that sets them apart from competitors. Remember to understand your target market, maintain consistency, and leave room for competitive advantage to thrive in the ever-evolving retail landscape.