Trading up: A Strategic Analysis of Reference Group Effects

Reference groups influence product and brand evaluations, especially when the product is a publicly consumed luxury good. Marketers of such luxury goods need to carefully balance two important social forces: (1) the desire of leaders to distinguish themselves from followers and (2) the countervailing desire of followers to assimilate with leaders. In this paper, we examine the theoretical implications of these social forces for firm prices, product design, and target consumer selection. We show that the presence of reference group effects can motivate firms to add costly features, which provide limited or no functional benefit to consumers. Furthermore, reference group effects can induce product proliferation on one hand and motivate firms to offer limited editions on the other hand. We find that offering a limited edition can increase sales and profits. In some cases, reference group effects can even lead to a buying frenzy.