The Consumer's Hierarchy of Preferences: Creating Consumer Surplus and Building a Brand

The Consumer's Hierarchy of Preferences: Creating Consumer Surplus and Building a Brand

Introduction:
In the world of retail, two distinct strategies are commonly employed by retailers - one focuses on building a brand to charge a premium, while the other aims to increase volumes by offering low prices. These strategies are driven by the concept of the consumer's hierarchy of preferences, where retailers strive to fulfill higher-level preferences to create loyal customers with a unique value proposition. This article explores how retailers employ these strategies to create consumer surplus and the importance of maintaining brand consistency.

Building a Brand: Positive Valence and Association
The first strategy employed by retailers is centered around building a brand that commands a premium. This is achieved by evoking a "positive valence" towards a product, a psychology term referring to a subconscious "good feeling" associated with a particular item. Retailers use the principle of association in advertising to create this positive valence. By aligning their brand with things that consumers feel good about, retailers transfer those positive feelings to their brand. For example, Coca-Cola made their soft drink an icon of American culture and happiness through ads featuring smiling individuals holding their product. The aim is to make consumers associate the brand with positive emotions, creating a deeper connection beyond the physical product itself.

Increasing Volumes: Consumer Value and Low Prices
In contrast, the second strategy focuses on increasing volumes rather than charging a premium. Retailers employing this strategy prioritize cost efficiency and aim to decrease costs as much as possible. By passing off the cost savings to consumers through low prices, these retailers stimulate demand and benefit from economies of scale. Their value proposition revolves around consumer value, with low prices forming a core competitive advantage. Retailers like Ross, TJ Maxx, and Target emphasize this value proposition in their slogans, such as "Dress for Less" and "Expect More. Pay Less." By meeting additional preferences on the consumer's hierarchy, these retailers effectively increase consumer surplus, creating a unique value proposition that distinguishes them from their competitors.

Maintaining Brand Consistency: Avoiding Brand Dilution
Regardless of the strategy chosen, maintaining brand consistency is crucial. Consistency ensures that every aspect of a business operation aligns with the brand's value proposition. Deviating from this consistency can lead to brand dilution and loss of customer trust. A prime example of brand dilution is Coach, a luxury brand that started rolling out products at lower price points and distributing them through outlet channels. This rapid expansion degraded the brand's luxury image, making it challenging to sell their high-end line of bags priced at $1,000+. Avoiding brand dilution is critical, as rebuilding a brand's image can be a daunting task.

Creating Consumer Surplus and Competitive Advantage
Both strategies, despite their differences, aim to create consumer surplus. This surplus represents the value that consumers perceive beyond what they pay for a product or service. By leaving some of this consumer surplus untouched, retailers can position themselves better in the market. Private equity firms, for example, have historically extracted consumer surplus by raising prices and cutting unvalued services. However, this approach sacrifices long-term company longevity. Leaving some consumer surplus intact allows retailers to maintain a competitive advantage while providing additional value to customers.

Actionable Advice:

1. Understand Your Target Audience: To effectively employ either strategy, it is crucial to understand the preferences and desires of your target audience. Conduct market research, analyze consumer behavior, and tailor your value proposition accordingly.

2. Consistency is Key: Whether building a brand or focusing on low prices, maintaining brand consistency is essential. Ensure that every aspect of your business operations reflects your value proposition, aligning with your brand's messaging and positioning.

3. Balance Consumer Surplus: Strive to strike a balance between extracting consumer surplus and leaving some intact. Leaving some surplus allows you to remain competitive while providing additional value to customers, fostering loyalty and long-term success.

Conclusion:
The consumer's hierarchy of preferences plays a significant role in shaping retail strategies. By understanding and fulfilling higher-level preferences, retailers can create consumer surplus and build a brand that resonates with customers. Whether aiming for a premium brand image or focusing on low prices, maintaining brand consistency is vital. Balancing the extraction of consumer surplus with providing additional value ensures a competitive advantage and fosters long-term success in the retail industry.