Yesterday, I was sitting in a coffee shop chatting when I ran into the most interesting issue. The woman at the table next to us was on the phone, and her conversation became a little heated. Since it was a personal call, she decided to excuse herself from the shop and finish the call outside. Turning to our table, she asked how long we’d be there and if we’d be willing to watch and “make sure no one runs off with my coffee.”
“Sure, we’ll be here for a while.” Then she ran off with her phone to her ear out the door, leaving her coffee … and brand new laptop computer … sitting behind on the table. We stared for a minute, then confirmed with one another, “she said to watch her coffee, right?”
The west coast undoubtedly a coffee culture. Home to Starbucks (Seattle), Seattle’s Best (Seattle), Stumptown Roasters (Portland), and Peet’s Coffee (Berkeley), we take our brewing very seriously. It’s no wonder that many of us frown on $4 gas prices while unflinchingly holding out our credit cards for the daily $5 mocha. When people give their morning cup-of-joe priority over their computer, though, it makes me wonder if the coffee is … well … underpriced.
I’ve recently started talking about the difference between “luxuries” and “necessities.” Most people use the term “commodities,” but I choose “necessities” instead for two reasons: 1) To avoid confusion with commodities markets and 2) for sake of the definition below. This is a perfect example of two products switching categories.
A luxury is a product carrying a high margin that is in no way needed (or thought to be needed) for everyday life. Luxuries offer consumers momentary escapes from reality, allowing them to believe they live in a higher, more care-free tax bracket that can afford to buy luxury goods as if they were piled in the discount bin. Jewelry, sports cars, and high-end perfume all fall into this category – arguably, your life would be unchanged if any of these products were removed from it.
A necessity is a product with a razor-thin margin that is absolutely necessary for maintaining your current standard of living. Necessities are often taken for granted and included as line-items in a monthly budget. Food, transportation, and living space are good examples of this category – keep in mind that these represent bare minimums for a specific standard of living … a Honda Civic could be considered a “necessity” for a middle class household, but a Jaguar-while still providing transportation-would not.
For many in earlier generations, coffee was a necessity of a fast-paced 50+ hour workweek. It was the only way to keep ahead of the eight ball while working from sun up to sun down and still maintaining a family life. Computers, on the other hand, were reserved for the very rich or the academics because their practical use in daily life had yet to be established. Coffee cost pennies to make, and about just as much to buy (or was provided for free) while computers were outlandishly expensive and impossible to afford.
Today, computers are priced “competitively.” Bargain-basement brands carry the same mechanics as designer (Apple?) ones and are still relatively close in price on the store shelf. They are mass-produced and can be purchased from a distance (online) in bulk. Many people point out daily that their workplace would collapse without computers and their lives (remember, we’re talking about specific standards of living) would come to a screeching halt.
Coffee, is a different story. We pay more for coffee than we do for bottled water or even gasoline. An espresso drink is hand-made to your custom order while you wait, in person, for the barista to finish. When strapped for cash, one of the first things to be eliminated from the budget (or at least downsized to a “tall”) is the daily “venti” cappuccino.
Which of these two products in the luxury in today’s market? Which one is the necessity? How exactly do you think they swapped categories? Is there a way your “necessity” brand can shift into the “luxury” market? What effect would that change have on your bottom line?