Growing The Pie
In 2008, a book titled Trading Up provided me with invaluable insight into consumer behavior that forever changed my perception of the commercial foodservice industry, and business in general. One of the key principles in the book is that, as individuals or as businesses, we have a fixed “pie” of available funds to spend. It is our natural tendency to spend more on the things we love – trading up to acquire them. In order to do so, however, we must trade down in other categories. As a result, both residential and commercial consumers are constantly evaluating options and making trade-up or trade-down decisions constantly.
With a trained eye, you can easily decipher where a customer’s priorities reside. Think of the business executive who drives a brand new luxury import sedan, but purchases socks in bulk at the local warehouse club. It is clear that this individual has traded up in vehicles and down in clothing. Of course there may also be the business executive who trades up in clothing, believing in making a good impression while in the presence of others, but who is driving a 10-year-old car. Neither decision is right or wrong; rather, they clearly communicate the consumer’s priorities.
It is important for any business to realize that a trade-up versus trade-down decision may include non-traditional competitors. For instance, a commercial foodservice equipment manufacturer may believe that they are battling with their traditional rivals for business when in fact the entire product category – or industry – may be a trade-down target vis a vis other priorities for hospitality operators such as training, advertising, etc. Commercial foodservice establishments may believe that they are competing against similar dining concepts, when in fact the competition may be from a grocery store, a new “dark restaurant,” a farmer’s market, etc.
In a capitalistic society, there is an inherent desire for continued growth. Revisiting the pie analogy, for every competitor within a particular marketplace to maintain their percentage of the current pie and still grow, the boundary of the pie – or the total revenue generated by the industry – must grow. In the absence of overall industry revenue growth, and where the boundaries of the pie remain constant, growth can only come from cannibalization of your competitor’s market share. Of course, your competitor will be looking to grow their market share as well, and they will be eyeing your business to do so.
This leads us back to another critical lesson I extracted from Trading Up – Product-Led Rebirth. As an industry matures, differentiation of goods and services diminishes leaving price as the primary (or only) factor in competition. When this point is reached, the provider is driven to take more money out of the product in order to remain competitive. Research and development is abandoned, and an unrecoverable downward spiral is initiated. It would seem that there is no possible solution, but the solution is in fact quite simple – new product innovation.
Trading Up is filled with examples of new companies that entered mature markets and quickly reshaped the space, leaving the legacy companies behind. In fact, these product-led revolutions reversed industry trends and those pioneering organizations began investing money back in to the products and services offered to achieve technical, functional, and emotional benefits – with an extra emphasis on the emotional component, as that is an area sorely overlooked by the foodservice and hospitality industries.
As for specific examples, think of what Netflix did to Blockbuster. Panera and Chipotle reshaped the fast-casual market. Whirlpool developed the Duet washer and dryer that had consumers saying they “loved” their washer and dryer. Folgers or Maxwell House could have easily developed a concept like Starbucks, but they didn’t. In each example, a new product, service, or format enticed consumers to trade up. Customers were willing to pay more for a product, not less. And with each instance, a new product – or industry – life cycle was initiated. This is the path forward, and it is both attainable and sustainable. It would grow the industry’s pie.