How to Grow a Business Through Customer Scale
Isn’t it interesting that...
Gap owns Old Navy and the Banana Republic
Toyota owns Lexus
Aldi owns Trader Joes
All of these are examples of businesses that grow through customer scale. The core concept is that every market can be broken up into three categories. The luxury high end, the mass middle, and the low end of the market.
The Customer Scale Break Down
Luxury High End
Let’s talk about luxury brands. The following brief points are what makes or breaks someone to turn to high-end brands.
This basic economic problem refers to the “gap between limited - that is, scare - resources and theoretically limitless wants”. We are seeing that sustained growth in the last two decades, driven by purchases from emerging economies, such as China and rising upper-middle classes (ScienceDirect). Because luxury is associated with rarity and exclusivity, these are huge drivers in marketing and driving sales.
In terms of sales margin, it is simply put as the amount of profit generated from the sale of a product or service (AccountingTools). However, it is also looked at as: is having more people buy one product important or is a few people with more products important? But in this case, there are people that are willing to pay high prices for high-quality products.
3. Brand Equity
"Brand equity refers to a value premium that a company generates from a product with a recognizable name when compared to a generic equivalent" (Investopedia). Brand premium is the amount over the “generic” brand. Here we see how much a brand is really worth towards an individual. This effects profit margins when customers attach a level of quality or “prestige” to a brand, they perceive that brand’s products as being worth more than products made by competitors, so they are willing to pay more (Investopedia). This is another driver of how important having an upscale status means to this group of people.
4. Social Currency
We see this happen almost every day on social media. This happens when people share brands or information about brands as part of their everyday social lives (Adweek). This tactic where “consumers’ willingness to share has great brand-building potential”,
according to Enrich Joachimsthaler.
When we say luxury brands, think about Rolex, Louis Vuitton, and Tiffany & Co. These iconic brands really understand how to appeal to affluent customers. Affluent customers are willing to pay a premium (margin) for rare products and experiences (scarcity) that afford them a high status (social currency) and value (brand equity).
Is built on four ideas:
This is plainly put as the number of items sold. This is generally good for investors and monitors break-even points/sales (AccountingTools). In this case for the mass middle, they tend to want to purchase a bit more to have high volume for a reasonable return/value price.
We all essentially understand that when something is affordable, the price is reasonable, inexpensive, and most people can afford it. This is an important concept to the mass middle so they can get a high volume of things.
When it comes to this, it's between the range of capabilities and performance. Sometimes, a middle class will purchase something that has extra functionalities because they don't mind if it matches the affordability.
We can see this idea as to where is this distributed and is it convenient? Are there franchises or just one store per county? Typically, for the mass middle, the brands they enjoy should be easily found offline (and of course, online if offline is not convenient).
Mass-market brands like H&M, Ford, Dell computers have mastered the art of standardization (volume/affordability), functionality (utility), and distribution (accessibility).
At the low end of the market really comes down to:
The lower the price, the better! If we have two of the same products next to each other, but the first product is $15 vs the second at $35, the majority of lower-class people will take the inexpensive price (or find somewhere else cheaper than that).
This class appreciates it when a product can be diverse in terms of being able to use it in multiple ways. Having products that are versatile, will have many purposes and use out of it than what it was originally for/advertised as.
Think about discount brands like Dollar General, Save a Lot, outlet retailers - they are really selling cheap. These are cheap products that are single-use that are no longer wanted by the mass market or luxury consumer.
Applying Customer Scale
The key to the customer scale is understanding that no single brand can effectively market to each segment at the same time. The moment a luxury product offers it to a middle mass, it no longer becomes luxury. The moment a mass-market product fails to sell at a high value, it is at the end of the life cycle and is now ready to be on the discount racks and second-hand stores. In order to maximize profits, smart businesses understand that they need different brands to connect with each market. The Gap is a mass-market product to reach the high end of the market they created the Banana Republic, their low-end product which is the Old Navy, often found in outlet malls and low rent districts, never find an Old Navy in Center City (Philadelphia).
A Successful Customer Scale in Business
In order to deploy the customer scale strategy, the business has to have the same supply chain and the same core business (still making cars if Toyota or clothes if Gap), but use cheaper or more expensive materials and a different advertising message in order to scale up or scale down. The cardinal rule is to never reach multiple customer segments with the same brand.
Here's a blog, where we dive deeper into customer segments (verticals), and how that also is a strategy to grow a business.
Here's a video with further explanation on not only the customer scale strategy but the other six, in order to expand the growth of a business.
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