On a recent shopping trip, a Phoenix couple with two children visited Sam's Club and bought paper towels, cereal, laundry detergent, cat food, coffee, milk -- items that sport a higher price tag at their regular supermarket. Then, because it was Saturday night, they drove across the street to a gourmet market where they bought Alaskan halibut at approximately $17.00 a pound.

This behavior pattern was repeated thousands of times that day in Phoenix alone as middle-class consumers prowled for bargains, then splurged on a precious luxury.

 

These are savvy buyers. They gather price information like covert operatives, making relatively sophisticated decisions about simple purchases. For example, they do not assume that the discounter will always be the cheapest for everything. The Phoenix couple passes up high ticket chicken at the chain supermarket, but stopped buying beer at Sam's when their neighborhood store began matching the price. For special products, though -- like the Alaskan halibut -- they pay a premium price.

The BMW in the Costco parking lot is the operative metaphor of Michael J. Silverstein's new book, "Treasure Hunt: Inside the Mind of the New Consumer," co-authored with John Butman. Silverstein describes the flip side of "trading up" -- the trend in the luxury sector that was the subject of his best-selling first book of the same name. Consumers are buying more pricey goods, he writes, but they are also "trading down" -- treasure hunting -- for bulk goods and items that do not have high emotional value.

The phenomenon creates huge opportunities for companies that figure out how to meet customers at the bottom or the top of the price continuum, and disaster for those stuck in the middle. Laden with numbers, charts and examples, "Treasure Hunt" could be the treasure map for businesses seeking to understand better how their customers think and what they want.

The bifurcating market

Silverstein, a senior vice president of the Boston Consulting Group, reports that the trading-up market accounts for $535 billion of the $3.7 trillion dollars consumers spend each year. Its growth at 15 percent per year over the past three years makes the trading-up market rich with possibilities. But the trading-down sector is even bigger: It is approaching $1 trillion and expected to hit $1.5 trillion by the end of the decade.

"Trading-down companies have created more than 10 times the market value that trading-up companies have created," Silverstein writes. And the phenomenon is world-wide. Patterns of consumption in Japan and the U.K. are similar to the U.S., and in Western Europe discounting is even more developed.

The growth is coming at the expense of the middle, he adds. Almost every category is expanding at the extremes: "What lies between is becoming a wasteland. In category after category, premium entries are growing, bargain brands are stealing share and the middle is shrinking."

The trading-down consumers are "unpredictable -- completely, delightfully, exasperatingly unpredictable," Silverstein writes. Their trading-down behavior, which defies sociology and conventional wisdom, falls into four categories. The "warrior shoppers" make shopping their job and regard it as a necessary skill, like driving. Others see no difference between products at different price points -- the result of improved manufacturing -- and so choose the cheaper alternative to a mid-market offering. Another group learned frugality at an early age from their parents and continue to uphold it as a value. And many simply do without, saving their spending capacity for children or other projects.

The book examines each type through financial profiles of real people. Silverstein's depiction of them is respectful -- they are hard-working people who make difficult choices every day, he says. For the most part they are not spendthrifts, he adds. As a group they are stressed, but in his view they are not financing their lives on credit. "Debt as a percentage of total assets is stable, and less than 5 percent of middle-class households are in significant financial distress," he writes. Further, in an argument that might pique some economists, he says they are savers, if you count homes, stocks, and -- curiously -- cars. The value calculus that drives the mega trend of trading down, he says, is not a result of want but of decision.

Their decisions, however, are driven by feelings -- the stress, fear, insecurity, isolation that afflicts most of us at varying levels throughout life's stages. Companies need to understand the emotional background of the buying habits of middle-market consumers.

How to win with the new mid-market consumer

Silverstein supplies a framework for companies trying to figure out how to succeed in this market, and gives examples of the stars as well as the failures.

Trading down opens up access to a massive market, but cheaper does not mean easy, Silverstein warns. Tightening up your supply chain and draining costs out will not be enough. These customers want value, performance, and the emotional satisfaction that comes from good design from their low-end purchases.  Trust a consultant to salt his advice with acronyms. Make BLCR your mantra, he says. That's "basic, low cost and reliable." Your product must be among the cheapest, but it has to be better too.  He cites the Mini Cooper as an example -- it's low price transportation, but "hardly boring."

Or you can opt to trade up. The key here is to figure out the technical or functional features that will strike a powerful emotional chord in consumers. Silverstein borrows the acronym here from Ely Calloway, founder of the Callaway Golf Company. Go for DSPD -- "demonstrably superior and pleasingly different." Companies that have succeeded here understand how to climb the "ladder of benefits." Although the top is already crowded, Silverstein thinks there is room for innovators in health care and financial services.

Some companies, he writes, "span the poles," offering products at both ends. "[Toyota] is a master at cost reduction, with a relentless drive to continuously cut product cost for every component and every make and model," he writes -- and their product line ranges from about $10,000 to $90,000. LG, the Korean electronics manufacturer, is another example, offering refrigerators that are inexpensive but also high price models. And Viking, maker of the status-symbol range, is developing products for the trading-down market, Silverstein reports.

"Hiding in the middle" is the most difficult and risky strategy, he writes. It is still a huge sector, but it is shrinking, he warns, and it will be increasingly difficult to succeed there.  What to do?  Move up or down, he recommends. Continuously drive costs down -- but never at the expense of quality. Try to have an out-of-body experience and evaluate your business like an outsider -- have you been blind to your customers, your opportunities? Really listen to your customers. Don't rely solely on surface-skimming focus groups.  Meet them, visit their homes, shop with them. Then when you find your loyalists, cater to them.

Silverstein admits that these strategies are the evergreen approaches of all successful companies, but the new market demands that they be implemented with great skill. His book manages to be a page-turner even as it fills out a consultant's report with data. 

Words to ponder, from Silverstein's introduction: "I respect those leaders who find a way to create products, brands and companies that connect with consumers … because -- in the whirl of meeting investor expectations, complying with Sarbanes-Oxley requirements, and motivating the workforce -- it is easy to 'forget' the consumer and lose touch with the market."