The Price is Right

Danielle Servedio, a student at New York's School of Visual Arts, is a frugal shopper. She found an apartment in Hoboken, New Jersey, to avoid paying Manhattan rents. She has a keen eye for a bargain at the grocery store, buying mostly items that are on sale. She filches cleaning supplies from her parents' house when she goes home to visit. But when it comes to shoes, she gives Carrie Bradshaw, Sex and the City's footwear-obsessed columnist, a run for her Manolos.

"I'm partial to stilettos," the 21-year-old Servedio says, stretching out her foot to reveal a sexy $350 pair of open-toed Via Spiga pumps, with pink and yellow polka dots and three-inch heels.

Patrick Hayes, 43, an account manager with Selway Machine Tool Co. in Union City, California, is an unrepentant skinflint when it comes to buying computer equipment and cameras, vigilantly searching online for rock-bottom prices. But when it comes to the premium Belvedere vodka in his martinis, he's utterly indifferent to cost. "I don't even think about the price because I know I'll enjoy it," he says. "The taste is so dramatically different, I never order anything else."

Joan and Robert Weiner, empty nesters in Sudbury, Massachusetts, recently completed an extensive remodeling of their colonial home, including a top-of-the-line kitchen renovation. Joan figures she spent $4,000 for her cherished Sub-Zero refrigerator, $900 for a warming drawer, and $1,200 for a state-of-the-art Fisher & Paykel dishwasher that Robert, a gadget fanatic, thought was "the coolest thing ever." But when it's time to stock up on paper goods, you're likely to find her hauling home a giant 12-pack of Bounty from her neighborhood warehouse discounter. "I'm a cheapskate," she says unapologetically. "When it came to this house, I didn't give in on anything. But when it comes to food shopping, or cleaning products, if it's not on sale, I won't buy it."

These consumers, with their schizophrenic buying habits--spendthrifts on some products, tightwads on others--are part of a growing trend, says Michael Silverstein, a senior vice president and director for the Boston Consulting Group. "They're willing to pay a premium price for products and services that possess higher levels of quality, taste, and aspiration--but are not so expensive as to be out of reach," he says. Silverstein uses the term "new luxury" to describe these products. Think Starbucks coffee, Aveda shampoo, Victoria's Secret lingerie, BMW cars, and Viking ranges--all of which command a pretty penny and engender fanatical customer loyalty.

Silverstein and his former BCG partner, Neil Fiske, have been studying this phenomenon, which they term "trading up," for the past 10 years, during which they have analyzed more than 30 categories of consumer goods and services and surveyed 2,300 consumers about their buying habits. Their new book, Trading Up: The New American Luxury (Portfolio, 2003), documents their investigation into the forces driving this trend and profiles companies that have cracked the code to success in this market.

We're not just talking Tiffany's here. New-luxury products range from such homely items as dog food and beer to such pricey but unromantic necessities as household appliances. But these products all share one im-portant characteristic: They evoke a stronger emotional response from con-sumers than comparable goods. And although they are priced as much as 20% to 200% more than their competi-tors', they also sell in much greater volumes than traditional up-market products, turning the usual price-volume demand curve on its ear.

That's good news for companies fretting that pricing pressure brought on by everything from the Internet to Wal-Mart to globalization has locked them into a corner with low margins and no flexibility. "The idea that it's impossible to raise prices anymore is totally false," says Silverstein. "New-luxury competitors have proved the opposite."

It's a huge opportunity for companies that understand consumers' lust for quality goods that forge an emotional connection. It also represents a huge risk for companies that offer neither low prices nor premium products. "When a new-luxury competitor enters the category, polarization can happen so fast that it becomes difficult to escape death in the middle," Silverstein says. But more about that later.