The Homa Files

Excerpted from Strategy & Business, “A Breakaway Opportunity for “Inferior” Products”, by Leslie Moeller, James Ryan, and Juan Carlos Webster, September 16, 2008

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As the difficult economy causes consumers to trade down in their purchases, companies need to adjust their offerings to their customers’ new behavior.

The current economic crisis is creating a “new normal” in consumer buying habits. Before the recent downturn, when consumers tried to save money, they traded down from branded products to private-label or so-called value brands. But they tended to keep buying some form of the product; they continued to pay for the convenience of, say, antibacterial throwaway wipes or gourmet frozen foods. In the current economy, they are not just trading down within a category, but switching to “inferior” products and services — paper towels instead of wipes, washcloths instead of paper towels. In the process, they are raising the value of the type of products and services economists call “inferior goods”: those that attract consumers more when purchasing power declines.

This will require a major shift of focus for many consumer-oriented companies. During the past decade or so, marketers have grown accustomed to the trend known as “premiumization”: Each year, consumers sought out higher-priced and more distinctive products.

Premiumization will never go away completely. But suddenly it has moved to the slow lane. The reason, of course, is the continuing economic downturn.

The impact has not been gentle on premium products, even the relatively inexpensive or everyday kinds. Retail sales figures for the second quarter of 2008 showed declines of 0.7 percent for Target Corporation (versus a gain of 2.7 percent for Wal-Mart Stores Inc., which has much less of a premium focus in its category) and a significant “mid-single-digit” decline for the Starbucks Corporation.

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If you can attract consumers to your category from another, the era of inferior products may bring you superior opportunities. Consumer-oriented companies should consider the following options when facing the current economic slowdown:

1. Don’t blindly lower prices to regain volume. Simply reducing prices could well be financially disastrous; it already has been for several casual-dining restaurant chains. Across-the-board price-cutting may lower the price of a $12 meal to $9 or $10, and thus affect the perceived value of, say, Boston Market versus Chipotle, but it will not have any effect on a consumer who is opting for a $5 meal by eating at home.

2. Find the inferior products that will attract consumers as their purchasing power decreases. Introduce a new brand or sub-brand in the categories to which consumers are moving in this downturn. Of course, companies will run the risk of potential cannibalization, but that’s still better than losing customers altogether.

3. Cement consumers to your brand. Once you have attracted consumers to your inferior product, bind them to your brand. Give them an experience that merits repurchase. Think about the products you can trade them up to when the economy starts to recover — for example, the health-conscious, convenient, or premium products that will make them stick to your brand as their incomes increase.

4. Make the new normal feel better. You can help consumers feel good about migrating to inferior goods by enabling them to justify their decisions in terms other than affordability. Toyota Motor Company’s Prius is a great example: Consumers don’t feel bad about trading in their BMW or Escalade, because they are doing their part for the environment; it’s not simply that they can’t afford anything more expensive.

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Brand owners and companies that offer products or services to customers across a broad range of price points, and that can manage the cycle, will fare better than those with more focused products and offerings that can’t adapt up- or downstream as consumer choices change.

Edit by DAF

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Full article:
http://www.strategy-business.com/li/leadingideas/li00093?pg=all

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