Written by Danling Xiao, Founder & Strategic Director, ReCo. Focus: consumer psychology and brand strategy for the AI age.

Last updated: June 2026  ·  ~12 min read

Scope: how a sustained cost-of-living crisis reshapes consumer behaviour, read through Maslow's hierarchy, with a brand strategy for each arm of the divide. Global evidence with an Australian lens. Not financial advice.

Overview

A prolonged cost-of-living crisis does not depress spending evenly. It splits the market into a K-shaped economy: asset-rich households keep spending while everyone else trades down, leans on Buy Now, Pay Later, and protects a few small luxuries. The top 20% of US households now hold close to 72% of total wealth, the highest share since records began in 1989 (Federal Reserve via Business Insider). 

The strategic error is still designing for an average customer who no longer exists. Every brand must decide which arm of the K it serves, then commit. The brands that win practise Dual-Tier Branding: satisfying safety and esteem at once, rather than forcing a choice between value and aspiration.

Walk down any Australian supermarket aisle and you will see the contradiction. The same shopper swapping a branded cereal for the Woolworths home-brand box will, two aisles over, drop $7 on a single artisan chocolate bar, and feel good about it.

This is not irrational. The old economic assumption was simple: when money tightens, non-essential spending contracts. 

Inflation stopped being a spike, people waited out and became a permanent, accumulated burden, what analysts now call a permacrisis. People adapted. They did not simply spend less. They re-sorted what spending means.

The cost-of-living crisis has split the market into two consumers

There is no longer an average customer. The K-shaped economy describes a recovery in which income groups diverge sharply. The upper arm is high-income households, lifted by property and equity gains, who keep spending. The lower arm is middle- and lower-income households, where real wages have lagged prices and discretionary spending is contracting (U.S. Bank). The divide is driven by asset ownership, which is why it has widened even as headline inflation has cooled.

The split shows up most clearly in how much of each household's budget is consumed by essentials. The higher you sit, the more freedom you keep:

Source: TD Economics.

The strategic consequence is blunt. Retail is consolidating at the two extremes, premium and value, while the mid-tier, offering neither the lowest price nor a clear reason to pay more, is losing share fastest (RetailStat). We return to what the trapped middle should do later in this piece.

Australia feels the same divide, sharpened by housing

Australia's version of the squeeze arrived later than the US but bit hard. CPI inflation peaked at 7.8% in the December 2022 quarter, the highest annual reading since 1990 (ABS). To buy the same basket of goods as a year earlier, the average household had to find an extra $7,844 a year, with housing, food and transport making up almost 68% of that increase (IPA).

Two local features make the Australian divide especially sharp. Household debt is heavily tied to variable-rate mortgages, so RBA rate rises hit spending power faster than in many economies. And the private-label shift has a uniquely Australian face: Aldi's steady share gains and the expansion of Woolworths and Coles own-brand ranges show value-seeking is now mainstream behaviour, not a fringe response. For an Australian brand, the K is not an imported idea. It is the shape of your own customer base.

Understanding consumer behaviour through Maslow's Hierarchy of Needs

Maslow's Hierarchy of Needs: a 1943 model of human motivation arranged in five tiers, physiological needs, safety, belonging, esteem and self-actualisation, usually drawn as a pyramid. Marketing has traditionally sold from the top: aspiration and identity.

When money tightens, attention slides down the pyramid toward safety and stability. But people do not abandon the higher tiers. They find cheaper routes to them. Three behaviours capture the whole pattern.

• Defensive buying (safety). Budgets shift toward food, housing and utilities. Brand loyalty gives way to price sensitivity, and around 80% of UK consumers now say they will buy private-label packaged food (EY Future Consumer Index).
• Borrowing to belong (belonging and esteem). Buy Now, Pay Later platforms such as Afterpay and Klarna split a purchase into a few interest-free installments, typically over 6 to 12 weeks. People use future income to hold a present lifestyle in place. Australia was an early adopter, which is part of why Afterpay began here.
• Small luxuries (esteem and joy). The lipstick effect: sales of small, affordable treats rise even as big-ticket spending falls. UK lipstick sales rose about 10% during the crunch, drawing roughly 310,000 new shoppers into the category (The Guardian).

This is the Paradox of Pessimism that BCG identifies: people are gloomy about “the world” yet keep spending based on “my world”, their own job security and savings (BCG). Emotion, not pure economics, drives the purchase. People are not just buying products. They are buying a feeling of control.

Maslow's model no longer fits the modern consumer

The hierarchy fails in two ways that matter for strategy. First, needs are not a staircase. Maslow's original framing implied lower needs must be met before higher ones. Wahba and Bridwell found little evidence for that strict sequence, and Maslow himself later said satisfaction is not an all-or-none phenomenon. A BNPL-funded treat is proof: people will trade a little financial safety for a moment of esteem.

Second, the model carries a Western, individualistic bias. It frames the summit as personal self-actualisation, when much of the world finds meaning through community and shared identity. Brands that read a downturn as “everyone retreats to private survival” miss the pull of belonging and collective resilience. Use Maslow as a compass, not a map: it points to safety and value as the dominant mood, but the winning brands keep a door open to joy and status at the same time.

Brands that read a downturn as “everyone retreats to private survival” miss the pull of belonging and collective resilience. 

The strategy: pick your arm of the K, then commit

The crisis has not made consumers cheaper. It has made them sort themselves. Before any tactic, a brand must answer one question: which arm of the K do we serve? The answer dictates everything else. What follows is two playbooks for the two arms, and a third path for the brands trapped in the middle.

Dual-Tier Branding: the practice of satisfying a consumer's safety needs and esteem needs within the same brand, or even the same product, rather than forcing a choice between value and aspiration. It is the thread that runs through all three playbooks below.

Playbook 1. The upper arm: premium that feels earned, not flaunted

High-income households are still spending, but the psychology has shifted from conspicuous display to justified consumption. The move is of quiet value at the top: lead with longevity, craftsmanship and time saved rather than logo status, and let cost-per-use logic do the persuading. This cohort buys experiences over objects and will pay to remove friction, so seamless access and membership matter more than discounts.

Mini case studies. Patagonia turns a premium price into a moral one. Rather than selling status, it sells a reason: buy less, buy better, and keep it for life. Its "Worn Wear" programme repairs gear, resells used items, and openly tells customers to repair before they replace. 

The result is a brand whose higher price feels like an act of values rather than vanity, and whose repair and resale activity deepens loyalty instead of cannibalising it. The cost is justified by meaning and longevity, and the same ethos bridges directly into the resale economy we turn to in Playbook 3.

Playbook 2. The lower arm: radical value with dignity

The lower arm is trading down, and the winning brands remove the shame from it, even make it feel smart. 

Three principles: 

• Price with everyday-low transparency rather than fake discounts
• Resist shrinkflation 
• Turn constraint into a treasure hunt, where finding the deal is itself a small joy.

The home brands are no longer the fallback. For many shoppers it is the proud, rational first choice.

Mini case studies. Dollar Tree added 2.4 million customers in a year, and nearly two-thirds came from households earning over $100,000, proof that trading down is now cross-income behaviour, not a poverty signal (GuruFocus). 

Five Below monetises affordable “small joys”, holding a 34.4% gross margin while expanding aggressively (Five Below). In Australia, Aldi's share gains and Kmart's reinvention as cheap-but-desirable are the same playbook in local form.

Playbook 3. The trapped middle: pick a side or build a bridge

Mid-tier brands with no price advantage and no prestige advantage are losing fastest. Standing still is the one option that guarantees decline. There are three honest choices, and each demands a real trade-off:

1. Trade down deliberately. Re-engineer toward transparent value and win on volume and trust. The trade-off: you likely surrender premium perception for good.
2. Trade up deliberately. Move to “affordable apex”, become the best in a small category and justify a premium through quality or meaning. The trade-off: a smaller addressable market and a duty to truly deliver, not just reposition.
3. Build a bridge with Offer a clear value tier and a clear premium tier under one brand, cleanly separated. The trade-off: operational complexity and the risk of blurring the brand if the tiers are not signposted.

Mini case study: resale as the bridge. Resale sits exactly where safety meets esteem. The global secondhand apparel market is on track for roughly $350 billion by 2028, growing far faster than traditional retail, and 79% of 18 to 24 year-olds buy secondhand versus 57% of over-65s (FashionUnited). Pre-loved luxury is on average 33% more affordable per wear than new fast fashion (Vestiaire Collective). One purchase delivers two Maslow tiers at once: the safety of a lower price and the esteem of a brand otherwise out of reach. This is why brands like Patagonia and Decathlon have launched their own branded resale, building the bridge inside their own walls.

What not to do. The losing move is to sit in the middle and hope. A brand offering neither the cheapest price nor a defensible reason to pay more is not playing it safe. In a K-shaped market, the centre is not a position. It is a gap.

The brands that win hold two truths at once

Sustained high living costs do not merely restrict spending. They rewire consumer psychology into a simultaneous pursuit of safety and esteem. The K-shaped economy has bifurcated the market, the mid-tier is thinning, and people now defend their psychology as carefully as their cash flow. The brands that grow through a downturn deliver uncompromising value and safety on the essentials, and offer accessible, guilt-free ways to indulge, belong and feel like themselves again. 

Decide which arm of the K you serve, commit to it, and use Dual-Tier Branding to meet both needs at once. The middle is not a refuge. It is the gap the market is closing.

Frequently asked questions

What is a K-shaped economy?

A recovery in which income groups diverge. Higher-income, asset-rich households keep spending (the upper arm of the K) while lower- and middle-income households face falling real purchasing power (the lower arm). The market polarises into premium and value, with a squeezed middle.

What is the lipstick effect?

The tendency for sales of small, affordable luxuries, such as lipstick, premium coffee or nice chocolate, to rise during downturns. People swap big discretionary purchases for small mood-boosters that deliver an emotional lift at low cost.

How should mid-market brands respond to a cost-of-living crisis?

Choose a direction rather than drifting. Trade down to transparent value, trade up to affordable-apex quality, or build a bridge with Dual-Tier Branding that offers separate value and premium tiers under one brand. The one losing move is to stay in the undifferentiated middle.

Is Maslow's hierarchy still useful for marketers?

As a directional tool, yes. It reliably predicts attention shifting toward safety and value when money is tight. But needs are not strictly sequential, and the model's individualistic, Western framing under-weights belonging and community. Use it as a compass, not a rulebook.

Why do people use Buy Now, Pay Later for everyday items?

To smooth cash flow. BNPL splits a cost into a few interest-free instalments, typically over 6 to 12 weeks, which helps when prices outpace income. Rising use for groceries and essentials is a signal of strain, not just convenience, and it carries real risk of debt accumulation.

Sources

BCG, why gloomy consumers keep spending (Paradox of Pessimism)
U.S. Bank, the K-shaped economy
TD Economics, US K-shaped consumer spending
Business Insider, the K-shaped economy and wealth concentration
RetailStat, the K-shaped economy
ABS, CPI international comparisons
IPA, Australia's rising cost-of-living challenge
EY Future Consumer Index (via Retail Tech Innovation Hub)
The Guardian, the lipstick effect
GuruFocus, Dollar Tree Q2 performance
Five Below, FY2024 results
FashionUnited, global resale to $350bn by 2028
Vestiaire Collective, 2024 Circularity Report

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