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, companies employ different strategies to attract consumers and build their brand. These strategies can be categorized into two ends of the strategy spectrum. The first strategy focuses on building a brand that allows the company to charge a premium for their products. This is achieved by creating a "positive valence" towards the product, which refers to a subconscious positive feeling that consumers have towards a particular brand. Retailers use the principle of association in advertising to create this positive valence. By associating their brand with things that consumers feel good about, the positive feeling is transferred to the brand itself.

A great example of this strategy is Coca-Cola. Through their advertising campaigns, they have made their soft drink an icon of American culture, prosperity, and happiness. By showing smiling people holding their soft drink, they have created a feeling of joy and happiness associated with their brand. When consumers buy a Coca-Cola, they are not just buying a sugary drink, but also buying into the feeling of happiness and prosperity that the brand represents. This is something that identically-tasting private label products cannot replicate.

On the other end of the spectrum, there are retailers who focus on increasing volumes rather than charging a premium price. These retailers aim to decrease costs as much as possible to pass on the savings to consumers and stimulate more demand. By offering low prices, they position their brand in terms of consumer value. Companies like Ross, TJ Maxx, and Target are well-known for their low prices and value-focused branding. Their moto and slogans clearly communicate their competitive advantage of offering more for less.

Both of these strategies create consumer surplus, which refers to the additional value that consumers receive beyond what they expect from a product. Companies that are able to meet more conditions on a consumer's hierarchy of preferences, beyond the point at which the consumer would have already made a satisfactory purchase, are effectively increasing the consumer surplus. This is crucial in creating loyal customers who see a unique value proposition in the brand that cannot be easily replicated by competitors.

It's important for retailers to ensure that their business operations reflect a consistent value proposition that aligns with their branding. One example of this is Costco, which intentionally keeps its oversized hot dog and soda combo priced at $1.50. This signals the value that customers can expect to receive at Costco. Consistency is key in avoiding brand dilution, as seen in the case of Coach. By rolling out lower-priced products and pushing them through outlet channels, Coach quickly degraded its luxury brand and lost the ability to sell high-end bags. Building back a brand after dilution is a challenging task.

Leaving some of the consumer surplus instead of extracting it all can put a retailer in a better competitive position. Private equity companies have historically focused on extracting consumer surplus by raising prices and cutting services that are not valued. However, this comes at the cost of lower expected company longevity. By leaving some of the consumer surplus, a retailer can maintain a strong competitive position and enjoy lower churn rates and higher customer lifetime value.

In conclusion, understanding the consumer's hierarchy of preferences is crucial for retailers to create a strong value proposition and build a loyal customer base. By employing different strategies on the spectrum, retailers can either focus on building a premium brand or offering value through lower prices. Three actionable 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. Clearly communicate your value proposition to consumers by positioning your brand in terms of consumer value.
3. Be consistent in your brand messaging and operations to avoid brand dilution.

By understanding and effectively implementing these strategies, retailers can create consumer surplus, increase customer satisfaction, and build a successful and long-lasting brand.