When Incomes Rise, Follow the Money
COMPANIES trying to reach a mass market for their products often err by setting the lowest possible price, according to [...]
October 10 2004 by Chief Executive
COMPANIES trying to reach a mass market for their products often err by setting the lowest possible price, according to Paul F. Nunes, an executive research fellow at the Accenture Institute for High Performance Business, a research arm of Accenture, the consulting firm. Average incomes have risen, and many consumers are willing to pay more for high-end products, says Mr. Nunes, the co-author, with Brian Johnson, of “Mass Affluence: Seven New Rules of Marketing to Today’s Consumer” (Harvard Business School Press, 2004). Following are excepts from a conversation with him:
Q. You argue that the mass market has changed. How?
A. It’s become an affluent mass market. The death of mass marketing has been greatly exaggerated.
Q. What income group are we talking about?
A. There’s been a dramatic shift in income over the last 30 years. Back in 1970, 87 percent of the population made under $65,000 in today’s dollars. They held about 68 percent of total paid-out income. But in 2000, the number earning under $65,000 was down to 70 percent. More importantly, their share of total income has declined to only 38 percent. That 17 percent of households that moved up to the above-$65,000 range has become much more important.
Q. Would you call it a near-luxury market?
A. I’d hesitate to do that because spending power has increased so dramatically, even for those at the $65,000 income range and below. There is a double effect: growing household incomes but also growing spending power, as more and better products become available cheaper and cheaper. Even average households today are able to move up to things like $7 spinning toothbrushes. That’s the kind of mass affluent product we’re talking about.
Q. Starbucks has certainly created coffee for the mass affluent market — but it’s not exactly a new product. How does that fit in?
A. We think companies like Starbucks and Panera Bread, instead of moving customers up, have gone to the position that a number of other companies have vacated. When McDonald’s first came out, the cost of a McDonald’s meal as a percentage of income was about what a Panera meal costs today. They defined a new middle.
Q. Who else has done a good job selling to the mass affluent?
A. Procter & Gamble has been especially good with things like white strips for teeth, spin brushes and even Swiffer mops. The old rule was that you had either premium or low-cost products. You avoided the middle. We say now you have to seize the middle ground. White strips capture the ground between $500 or $1,000 professional whitening processes in a dentist’s office versus a whole range of whitening toothpastes costing $2 to $7. P.&G. has repeated this process in a number of areas, all of which now have $1 billion in sales.
Q. So by stressing low prices, Wal-Mart isn’t reaching the sweet spot in the market?
A. Wal-Mart has a stated target of around $45,000 household income. Compare that with Target, which has a stated target of $75,000 household income. That involves fewer households but it’s more in the sweet spot of the density of where income is today.
Q. In autos, who has really nailed this new affluent market?
A. You’d think the sweet spot would be entry-level luxury, and it has been. Tremendous things have been going on there.
But we like to tell the story a different way. Really rich people have chauffeurs, of course. So look at the New York area’s black-car service, those chauffeured Lincoln Town Cars that take executives to the airport. They do an awful lot more of shuffling around everyday folks these days.
Q. What are some smart ways to reach the mass affluent?
A. A good example is Captivate Network, the people who’ve put the flat-panel TV’s in elevators, capturing a high-income portion of the population but not in any specific, highly targeted way. It turns out that the advertising used in those elevators garners a much higher share of mind, much higher unaided recall and much higher aided recall. It makes a ton of sense. You’re capturing business buyers when their minds are involved in business as opposed to being at home watching a golf match.
Q. Are there any other common themes of companies getting this new market right?
A. Successful companies today are rethinking the whole concept of ownership, changing the duration, the payment method and the number of owners. Take exotic-car shares, which allow five people to go in on the purchase of a Ferrari or a Lamborghini. For a service fee, you get seven weeks a year with a beautiful, clean, polished, well-tuned Ferrari, which you partially own.
Q. How does this affect longtime makers of luxury goods?
A. What this means for luxury makers and traditional mass marketers is that all sorts of new, higher price points can be reached.
A good example is the luxury car market. In 2003, there were nine models between $100,000 and $200,000. In 2004, there were 17 such models. What’s happening is that a lot of traditional makers are creeping up to attack this market. That has implications for companies like Bentley, which has always resided in this high-price-point range. Traditional luxury car makers definitely need to rethink their price points. They have to ask themselves if their prices have kept pace with household income. That’s where we find a lot of companies falling down.