Why Some Splurge Even When Times Are Tough

Sept. 22, 2003 -- To save money, Christine Rene and her husband, who bought a house last year, have cut back on dining out and now drive instead of fly on short trips.

But Rene won't cut back on a few other pricey items. She still likes Bobbi Brown makeup — whose $38 foundation costs four times as much as drugstore brands like Maybelline. She still spends $19 on Eukanuba cat food and on pricey coffee breaks at Starbucks.

"When I want to have a nice cup of coffee, if I'm going to spend money to have that extra kind of treat, I'll spend the money to have the best," says Rene, 28, who works at a banking association in Washington, D.C.

And many other consumers are doing what Rene does — facing economic doldrums, they cut back on less important items, yet still shell out to treat themselves to products that sell for much higher prices than comparable ones.

Notes Paula Kalandiak, retail analyst for Wells Fargo in San Francisco who covers companies like handbag and leather accessory maker Coach and high-end jeweler Tiffany: "When you get accustomed to making higher end purchases, just because the economy turns bad doesn't mean you're going to curtail all luxury spending."

The New Luxury

The phenomenon is referred to as "rocketing" by an upcoming book, Trading Up: The New American Luxury, which profiles firms that have gotten consumers to splurge on their products even as the economy went sour.

These "new luxury" items, write authors Michael Silverstein of the Boston Consulting Group and Michael Fiske, Bath & Body Works chief executive and former Boston Consulting Group senior vice president, include anything from BMW cars to Callaway golf clubs to, ironically, flights on low-cost air carrier JetBlue.

The authors looked at 15 new luxury companies whose goods sell at a premium of anywhere between 20 percent and 200 percent to their competitors, and found their sales rose by an average of 17.8 percent in the first six months of this year compared with the same period last year.

What separates these products from those that consumers throw by the wayside when given a choice? It's the companies' ability, argue the authors, to forge an emotional relationship with consumers, who in turn will be willing to spend extra money for products even if they have to sacrifice other things.

"We call that 'stretching,' " says Jim McDowell, BMW North America's vice president of marketing. "[Consumers] stretch a little further to be able to afford that BMW 3 series, and increasingly they forego other aspects of their personal consumption to be able to obtain this at an early age."

An Emotional Pull

BMW, for example, tries to appeal to both the physical and emotional needs of customers by getting people not only to drive its cars, but also by producing offbeat marketing campaigns like last year's Internet short film series produced by some of Hollywood's hottest directors.

The company also participates in events such as The Ultimate Drive, where the company sends a special fleet of cars around the country for people to test drive, and donates $1 for every mile driven to the Susan G. Komen Breast Cancer Foundation.

"It's something that when people have experienced it, they just can't live without it," says McDowell.

The strategy seems to be paying off. BMW's group sales rose 0.5 percent in the first eight months of this year to 712,650 cars, mainly due to the success of the company's Mini brand. McDowell also notes the company has not offered any zero percent financing deals to lure buyers, as many of its competitors have.

Another pricey product mentioned in Trading Up that has been popular with consumers is the Viking line of kitchen ranges, which retail anywhere from around $3,700 for a 30-inch, four-burner stove to $8,000 for a 60-inch, four-burner stove.

The privately held Greenwood, Miss.-based company does not release sales figures, but spokeswoman Nancy Bauer says sales of the ranges have benefited from the mortgage refinancing boom that has fueled home improvements, as well as from many consumers' newfound interest in domestic activities like cooking.

"It's almost as if we've created a mystique — Viking has a tremendous drool factor," says Bauer. "It's made it something that people want and aspire to. Either they can afford it or people will save up for it."

Indeed, researchers note many of these companies have been able to create almost a club-like atmosphere among their buyers, which can be a powerful marketing tool.

"A lot of it is word of mouth," says Bill Matassoni, partner at BCG who worked on the book. "It's as if 'club' has become more important than 'brand.' You use one of these products and you like to talk about it."

Demographic Shifts Spur Spending

Researchers say the phenomenon of trading up is not necessarily new, but demographic changes — as well as the drastic shift from the booming economy of the late '90s to the recent economic downturn — has made the practice more common.

For example, household incomes for people earning more than $82,000 a year rose nearly 70 percent from 1970 to 2000. Americans' increased wealth in their home equities, as well as the higher purchasing power of women, have contributed to people's buying power.

Further, higher divorce rates can boost this type of consumption since the spending habits of divorced people tends to change dramatically — often on items that make the person feel better, notes Trading Up.

Americans' greater exposure to high-level products through the media or trips abroad, along with recommendations from tastemakers like Oprah Winfrey or Martha Stewart, have made many American consumers more savvy about the kinds of products they buy.

Indeed, one demographic, referred to as "Bobos" — short for Bourgeois Bohemians — in the book Bobos in Paradise: The New Upper Class and How They Got There by David Brooks, talks of a new class of people who sip lattes, drive SUVs and spend top dollar on everything from appliances to specialty foods.

And at least one New York City-based advertiser is working to reach that demographic. Start-up advertising agency Amalgamated has come up with its own "Bobo Index" in which it ranks cities by Bobos per capita and compares media costs in those areas.

"It's been one of the biggest cultural shifts in the last two decades," says Amalgamated co-founder Doug Cameron, who describes Bobos as people who will "spend money to show how little they care about earthly possessions."

"It's a new form of reverse snobbery and people are willing to pay a premium for it," he says.

Is it a Good Thing?

But it's not all about expensive items. Low-cost airline JetBlue has become wildly popular by appealing to upscale travelers with luxurious touches like leather seats, personal televisions and cards that show flyers how to do in-flight yoga postures.

"We position our brand aspirationally to attract Manhattanites; to attract savvy and sophisticated travelers," says JetBlue spokesman Gareth Edmondson-Jones.

But what about the proverbial question, can things really make people happy? Despite marketers waxing poetic about the emotional attachment customers have to their product, some social observers are doubtful.

"If people are buying higher quality products because they will last longer, to keep, and they can afford it, that doesn't seem to me to be a bad idea," says John DeGraaf, author of Affluenza: The All Consuming Epidemic, a book about Americans' consumption habits gone overboard.

But, he adds, "If you're trading up for status and you're spending a lot more to have these items to look good, the cost of that is just potential debt, increased work time and therefore less time with your family."