I read a lot of history and business books. There’s always a “fad” book everyone is reading. Some, Like Christensen’s Innovator’s Dilemma become classics. But sometimes they come, go, and are forgotten.Either way, most have some good insights and I usually learn something, but once in a while I find an idea that really bowls me over.
Silverstein and Fiske’s Trading Up (2003) is one such book; profound, yet somewhat forgotten. It lacks a sticky buzzword like “Disruptive Innovation” to work its way into industry jargon, and there’s less sustained interest in customers than technology. But I want to recommend that you read it and explain the core insight. If I convince you, get it here.
A great theory explains something you’ve observed, and helps predict more. Trading Up does this for me, all the time. It comes to mind often when discussing our industry and markets. It’s about how customers think about product categories.
A simple hypothesis that explains a lot
Customers come in all types of incomes; poor , rich , and a continuous distribution in between. Most are in the middle or poor, and a few are rich. It’s reasonable to assume that in any given market, there will thus be a ton of volume in the low and middle range, and a few units sold in the high end. But usually this isn’t true. Volume is found in the low end and the high end, but it’s rough to be “stuck in the middle”. The paradox is that you’d expect most middle-income people to buy midrange products, making it the biggest segment.
But this isn’t how real people behave. Trading Up cites customer research and case studies to show that almost all consumers – from poor to rich – buy products in the low or high end. This is because even poor consumers pick categories that they care about and stretch to buy premium products (trading up). In categories they don’t care about, they scrimp and go bargain (trade down). As a consequence, there isn’t much of a middle.
This is obvious when I think about myself. I care about skiing, so I own nice Volkls. I don’t care about my washing machine, so I got a one-up-from-the-bottom Kenmore on sale. There are almost no categories where I care a little, but not much, so I don’t want the cheapest, but I also don’t want the most expensive, so I’ll spend extra to get the mediocre midrange product. I either trade up or trade down.
The implications of this insight are everywhere. Think about smartphones: A large premium market (Samsung and Apple) which is bigger than you’d expect. There’s an incredibly vast low end market (LG, Xiaomi, Huawei, etc…) who sell lots of units at razor thin margins. It’s great to be premium. It’s good to be bargain. But who’s in the middle? HTC, I suppose – but that’s not ending well. The low end units are OK, the high end confers status and performance, but who wants to pay more than bargain to get a little better than OK?
As soon as you understand this, many strategies become obvious failures. You need to either be a bargain (because you’ve got process innovation or scale) or be a high end status product. Anything inbetween lacks a market.
The theory also provides ample evidence that even when you’re securely in the high or low end, you must constantly be wary. If you’re the cheapest, you must beware someone figuring out how to be cheaper, as when Kmart was forced into the middle and destroyed by Walmart, or as is happening now to Proctor and Gamble with cheaper generic and bargain brands and arguably to Microsoft Windows with Android and ChromeOS.
If you’re the premium player, you must beware someone with an alternative definition of premium, as when US car makers suffered when the definition of premium went from luxury to performance to their detriment. You must also fear the temptation to go mid market for more volume as it could sink your premium brand and pull your products into the middle.
I constantly point people to this book. Buy or borrow it, and read through for a lot more detail and proofs.