Consumer spending is polarizing. The average consumer in America is becoming more sophisticated and demanding about how she spends her money. No longer satisfied with the average, one-size-fits-all offering in a variety of categories, she is deciding what is important to her and what is not, then trading up in categories that are important to her and trading down in other areas.

When trading up, she is willing to pay more for high-quality, branded products and services. She funds this by trading down and seeking the lowest-cost items -- often switching brands or buying private-label products -- in the categories that matter less.

This trend has important implications for investors. I have written a number of pieces that touch on this issue in the grocery business, noting that companies with traditional business models like Safeway (NYSE:SWY) are caught between discounters like Costco (NASDAQ:COST) that offer much lower prices (but less variety) and stores like Whole Foods (NASDAQ:WFMI) that have a higher quality offering.

The Boston Consulting Group (BCG), a leading management consultancy, has just released a report that examines this trend across several product categories -- everything from travel to beer. The report is a 2004 update on the book Trading Up: The New American Luxury, by BCG partners Michael Silverstein and Neil Fiske, which was first published in 2003.

Are buses polarizing?
The report includes an in-depth discussion of the travel industry, with a particular focus on an unlikely segment -- bus transportation. While bus travel may not be the sexiest industry, it provides an outstanding illustration of the polarization of customer spending.

Traditionally, bus travel was dominated by standardized, one-size-fits-all offerings from Greyhound and a handful of regional competitors. However, in the competitive Boston-to-New York market, customers have recently been shifting their spending away from these traditional offerings.

At the high end of the spectrum is Limoliner, a luxury bus said to cost $500,000 that seats 28 in comparison to the 55-seat capacity of a standard bus. Launched in October 2003, Limoliner charges $138 round-trip, more than double the $55 charged by Greyhound (but significantly less than the airline shuttles). The company provides roomy leather seats, Internet access, TV, power outlets, and an on-board concierge.

At the other end of the spectrum is Fung Wah Bus. This service will get you from Chinatown in Boston to Chinatown in New York for a mere $10. The seats are cramped, and there are no on-board services and no terminal at either end -- passengers are picked up and dropped off curbside. But after eight years in the business, the company claims to be the largest bus service operating between New York and Boston.

Sound vaguely familiar? Perhaps the notion that the no-frills airlines like Southwest Airlines (NYSE:LUV) will dominate the domestic airline industry is not as far-fetched as the traditional airlines would like their shareholders to believe.

More insights
BCG's report also provides a number of other valuable insights for investors that are applicable across a variety of sectors.

Traditional demand curve economics don't always hold. In Economics 101, we were taught that the demand curve is fundamental in a competitive market. There is a trade-off between price and quantity, and companies either have a high-price, low-volume niche of an industry, or they sell large quantities at a relatively low price.

BCG makes the point that if companies are able to tap into a polarization of customer spending, they can sell a higher-priced product and increase volumes at the same time. Starbucks (NASDAQ:SBUX) is the classic example. Coffee consumption in the U.S. was decreasing before Starbucks entered the market; since its entrance, the volume of coffee sold in the U.S. has increased despite the fact that a cup of coffee at Starbucks can easily cost more than $3.

Profits are weighted at the ends of the spectrum. BCG estimates that in most product categories, new luxury goods (goods on which consumers are splurging) account for only about 20% of industry volume, but as much as 60% of profits. At the same time, the low-cost end of the spectrum can also be highly profitable for companies with the leanest cost structures, as Wal-Mart (NYSE:WMT) and Southwest have clearly demonstrated.

Companies that successfully tap into this trend are great investments. BCG's report identifies 15 companies that have successfully tapped into this trend, including an example in the restaurant industry, P.F. Chang's (NASDAQ:PFCB). The median five-year annual rate of return to shareholders for these 15 companies is 16%. That compares to 5% for the median of the S&P 500 and 12% for the top quartile of companies in the S&P 500.

Though, perhaps, still not yet evident in all consumer segments of the economy, the polarization of customer spending is a fundamental and growing trend. The next time you find yourself driving around looking for the cheapest gas with a Starbucks latte in hand, it may be worth thinking about where you personally trade up and trade down, and which industries might be next to see customer spending polarize. Likely candidates for me include movies, dry cleaning, and car rentals -- but I'm sure there are many others that I have not thought of.

Fool contributor Salim Haji lives in Denver, Colo. He trades up for good wine, for which he has convinced himself he has more than adequately compensated by trading down by buying his paper towels at Costco. He owns shares of Whole Foods and Costco, but none of the other companies mentioned. The Motley Fool is investors writing for investors.