Life Style Marketing

The Dilemma of the Upper Middle Class: The Adam Smith Problem

Towards the end of the 20th century it was clear to leading economists and sociologists that capitalism as it was experienced in the United States had taken a turn and was heading into uncharted waters. On the positive side, as it were, Jay Galbraith referred to entering The Affluent Society. On the less positive side Daniel Bell described The Cultural Contradictions of Capitalism. A key element of this change was the shift in the economy from dependence on production to the dependence on consumption; from a spirit of asceticism to a spirit of acquisitiveness (Bell, p 283).

Two facts confirm the persistence of this trend: The continued out-sourcing of production to developing countries and the increasing share of GDP represented by consumer disretionary spending.

Ironically this turn of events has become a double-edged sword for a portion of the popluation originally believed to benefit the most: The Upper Middle Class. (For sake of argument consider this segment to include anyone living in a household with $150,000 or more of annual income and $1.5M in assets.). The dilemma is that if they continue discretionary spending they are pillored in the popular press; if they don't the economy enters (or stays in) a recession and there is an increased possibility that their position will be elminated.

In the near term upper middle class consumers are avoiding the problem by using any excess cash to pay down debt and/or to increase savings. As the rate of savings and the rate of indebtedness return to more tolerable (or at least more historic) level, the question about spending will become more insistent. We already see this in the automotive category where the age of the vehicle parc is at abnormally high levels and for sheer safety and maintenance reasons replacement by new vehciles are worth rational consideration. The last time they bought a new vehicle it might have been to "keep up with the Jones." Today it will be to keep on the road.

What is the solution that will allow this segment to resume discretionary spending without fearing social criticism? Even though they constitute only a small fraction of the population they are responsible for a much larger portion of the GDP. If they continue saving (as recommended historically by classical economists who favor capitalism) they will further lower production, create unemployment and reduce the attractiveness of investment overall. If they spend they will be accused of hedonism.

This is a strange version of what has been called "The Adam Smith Problem." Smith is known for two books. One has been interpreted as promoting self-interest (Wealth of Nations) and the other for promoting moral conduct (The Theory of Moral Sentiments). It was not immediately clear to his readers how to reconcile the two objectives. What decision-process would affluent consumers use to make personal decisions about the acquisition and eventual allocation of their discretionary economic capital that would enable them to balance the apparently conflicting needs of society? How could they reconcile the attainment of rewards justly deserved by their indiviual effort with the social criticism they received when they dispersed those rewards on anything other than charity?

Our research into the motives of affluent consumers provides very useful insight into this question. It provides guidelines for individuals as well as the companies (and philanthopies) that market to them.

In Memoriam

ON THIS DAY (quoted from the NY Times

On this day, November 22, 1963, President John F. Kennedy was assassinated in Dallas. Suspected gunman Lee Harvey Oswald was arrested. Vice President Lyndon B. Johnson was sworn in as the 36th President of the United States.

 

Probably everyone I know remembers where they were on this day at the moment when they heard. I was walking through the cafeteria of the University of Dallas. The only other day and moment I recall as clearly was 9/11.

 

On each of those days America as a nation and Americans as individuals lost something in addition to the individuals whose lives were so unjustly and cruelly taken by other individuals. For myself I lost the naive assumption that anything in human existence was sacred; that things of value were really protected by custom, tradition.

 

My condolences to the relatives of the fallen and the survivors.

 

The Mind of the Affluent Consumer: Intrapersonal Conflict

Durkheim proposed that society imposes restraints that limit the behavior of individuals. This proposal was part of the rationale for believing that society has a reality independent of the wills of individuals.

We have just completed a review of our data from this perspective. Our surveys ask affluent consumers to rate the relative importance of almost 2 dozen motives related to the acquisition of discretionary goods and services. One statistical group of these "personal drivers" describe how important a purchase is to, in effect, "being oneself." The two other group of persoal drivers describe (a) various types of feedback that a person might get from others and (b) reactions the individual might have to that feedback.

In a stratistical test that observes the relationship among these various personal drivers it was determined that there are signficant negative relationships bewteen satisfying a driver related to "being myself" and the majority of drivers related to feedback from others and the response to that feedback.

We interpret these results that Durkheim's premise is correct at least to the extent that a consumer anticipates how others will react and how the consumer him/herself will respond to that feedback.

The implication for merchants is to recognize that each potential choice of a good or service carries with it a consideration of others reactions. Anything that can be done to mitigate anticipated negative feedback, or the impact of that feedback, will be useful. (This phenomenon is also related to the issue of "avoidance of regret" mentioned by Thaler in his research.)

Our next step is to look at consumer preferences in brands in light of their sensitivity to feedback from others. One interesting note is that the personal driver of "show good taste" was not in opposition to any of the drivers associated with "being myself."

The Mind of the Affluent Consumer

Today I reviewed our most recent analysis of affluent consumers with marketers for a non-profit organization. For a change I began with a description of the mental process the consumer goes thru, as reflected in our data.

There are five simultaneous equations, so to speak, that the consumer processes. The output of each equation impacts the processing of the other 4 equations. The first equation captures how the consumer personally responds to the item. The second is a more objective assessment of the items actual qualities. The third equation describes how others the consumer knows will respond to the consumer owning the object. The fourth is how the consumer will react to the responses of others. Finally, the consumer computes the actual image that ownership of the object will project to 3rd parties who the consumer does not know personally.

The response to this sequence of presentation was positive. My mon-profit marketers were able to relate this to their own sense of their thought process went, especially when being asked to consider something a bit out of the ordinatary for them.There was also agreement that most of the time this process runs at the "subliminal" level, when relatively routine purchases are being considered.

Quasi Rational Marketing: LifeStyle as a Sunk Cost

As marketing becomes more data driven there is an increasing need for models which can explain consumer behavior, develop recommendations for action and predict results. This has proven to be a difficult task because so much of consumer behavior seems irrational. For example, why would someone buy an article at full price knowing that in a short period of time it will be available on sale? Or why would someone buy an article at full price on the internet when it is available at a discount at a nearby store?

Richard Thaler (http://en.wikipedia.org/wiki/Richard_Thaler) provides an explanation of reasons why consumers make what appear to be unreasonable choices. He uses examples from various simulations to illustrate his points. He explains that the difference between what he calls "quasi rational economics" and classical economics is, at least in part, the result of substituting the concept of "values" for what has been classically known as "utility." The concept of "values" enables the inclusion of non-monetary variables into decision models. For example the weight given to either "pain" or "pleasure." Another difference is the inclusion of the context of the decision-maker. For example a decision regarding winning or losing $10 will be made differently by someone worth $10M than it will by an unemployed person with no income or assets. Another set of siituations are those with either forward looking or backward looking costs. One involvies "sunk costs," (when a person already has made a partial investment, say in buying a membership); another is "regret avoiidance" in which an individual reduces his future alternatives in order to avoid missing a clear opportunity (all-inclusive vacations are an example).

Many of the hypotheses of quasi rational economics have been tested and validated against data sets like stock market transactions and pari-mutual betting which have very defined start-and-stop periods.

Thaler indicates an interest in finding other types of data which might prove relevant over longer time periods. We are struck by the ability of quasi rational economics to explain consumer decisions involved in the multi-year process of developing and maintaining "life style." For example, having a livingroom already full of a certain style of furniture would represent a "sunk cost" for a consumer who is considering adding an additional piece. The prior choices (called "prior disposition") would heavily influence the current consideration. This might also relate to what Thaler terms "framing."

In a similar fashion the importance we have recorded in people's desire to avoid criticism or attention for making a choice would be analogous to "regret avoidance." Such factors would help explain the equivalent of "opportunity loss."

Regarding the initial example of a person choosing to buy now or wait and buy on sale, life style research has idnetified the explicit value of "trendiness" to which some consumers gives great weight (and get psychic pleasure) to having an article early in the fashion cycle. In any event, we are encouraged that our data and metrics may prove useful demonstrations of quasi rational economics. It certainly will provide a powerful economic explanation for why consumers maintain life styles.

Customer Capital and Quasi Rational Marketing

The information in this blog entry summarizes new information about what individual customers value in a firm's products and services. This information (called "customer capital") will be used to calculate the value of customers on a much more accurate and actionable basis .

For some time sociologists have known that affluent people purchase discretionary goods and services for symbolic as well as practical value. Some have argued that the primary value of these goods and services is their effectiveness in communicating status. The benefits of these insights have been available to marketers of luxury brands in the form of marketing consulting and/or market research.

Economists have also studied luxury goods and recognize that these goods provide "utilities" in addition to their functionality. Economists recognize the importance of "personal taste" in influcing these decisions at the individual level. As a result they have not attempted to measure the decision making process of affluent individuals due to the lack of reliable "preference" metrics. In this case "reliable" means metrics that are repeatable over multiple purchases and are applicable across multiple product categories. The classic economic problem might be identifying and measuring the preferences of individuals for using the same amount of money for the purpose of making a down payment on an automobile versus taking a vacation. Some economists (Richard Thaler, for example) refer to this type of decision as "quasi rational" since factors other than economic play such an important role.(https://www.russellsage.org/publications/quasi-rational-economics).

We are very pleased that our research regarding "personal drivers of consumption" may provide a set of preference metrics that economists can include in their designs. These preference metrics claerly differentiate the "tastes" of individuals and correlate with spending behavior across multiple product and service categories. We are looking for a University that would like to have access to our data base. And we are working with several clients to help them achieve the benefits of what we may call Quasi Rational Marketing.

The World's Worst Salesperson

I had come to believe I was the world's worst salesperson. I have an offering which is guaranteed to produce a 10x return on investment (ROI). When properly applied it results in 200%-500% increases in revenue-per-email I have presented it to a variety of companies. A few have tested it and achieved the results. The rest have either ignored the results or said "too good to be true." As I said, this had brought me to the conclusion that I must be doing something terribly wrong.

Then I read Thinking, Fast and Slow by Daniel Kahneman, a Nobel Prize winner in economics. ( http://www.businessweek.com/magazine/book-review-thinking-fast-and-slow-by-daniel-kahneman-10272011.html) I realized that the reason that our LifeStyle research is receiving such a dismissive response is that I have been talking to my prospect's System 1 frame of mind. This is the lightening fast mechanism we are all equipped with that helps us decide what to pay attention to and what to ignore. It relies on heuristics developed over time. My prospects have all been taught that "if something sounds too good to be true it probably is." So now it makes sense to me that this work has received the initial reaction that it has. It is not that I am the world's worst salesperson. It's that I have a totally new idea to present. I should expect this.

What I need to do, I realize, is anticipate this initial reaction and immediately address the "too good to be true" objection. How does one do this? Kahneman, whose work challenged conventional wisdom, gives a suggestion in the book. He indicates that people are more likely to change an embedded attitude if confronted with a particular and striking instance which demonstrates the new point. Kahneman says that people can sometimes "go from the particular to the general" and change an opinion. It is much harder to go from the general to the particular.

So, it will be better for me to start with the case histories (the particular) and move to the benefit (the general 200-500%) rather than state the benefit first and then move to the demonstrations. A good lesson for a marketer to learn. Thank you, professor.

How a Brand Thinks

Marketers often recommend conceptualizing a brand as a person. In this mode of thought, various human attributes are attached to the brand. These attributes are often the ones research has indicated are most important to the consumer. A famous example (dating myself) was the creation of the Marlboro Man to embody the attributes male smokers valued. Another example is Betty Crocker. Most brand statements today include some version of a brand personality.

What is missing? Well, if you are an employee of the brand you may have a question regarding how you (as an example) a 23 year old MBA graduate working in sales, how do you get to the point where you can act like the Marlboro Man might act in a particular situation? Not that you have to wear chaps and carry a branding iron; but how do you display the character of your brand in your personal behavior?

Or if you are working in Nordstroms, how do you enact that brand personality? Or a Mercedes dealership's personality? This is where the concept of a "habitus" (http://en.wikipedia.org/wiki/Habitus_(sociology) comes into play. There are several steps in developing (let's use the more common term) a habit. For example, there must be memories of actually performing the behavior to draw on. These behaviors are rooted in a belief.

So when we ask the MBA graduate to "act the way the Marlboro Man would" we should have previously provided some insight into how the true (brand) Marlboro man thinks and what he he believes in. We should have provided insight into how and why the Marlboro Man translates this in a particular set of behaviors. Very importantly we would provide insight into why other, alternate behaviors would not be acceptable to the Marlboro Man, even if they would be socially acceptable to someone else.

And we would have provided our MBA graduate an opportunity to practice.

The point is that an employee can act like the brand only if he/she has been taught to think and feel like the brand.

Aligning Organizational Culture and Brand Identity

Senior Executives of companies providing products and services know that their company's brand is a core asset. They know that their organization's "culture" should reflect (enact) the brand. How do they convey this imperative to the people they lead?

Clearly the executive's personal behavior is an essential demonstration. If a brand attribute is being "customer-centric" then how much time do they spend asking about customer-related information (other than revnues and costs)? How often do they interact with customers.

If "passion" is a brand attribute, how do they display the appropriate level if intensity in caring about the product and its delivery? Since "passion" is about unsatisfied desires, how much time do they have the organization spend identiying latent customer desires?

These are simple questions intended to illustrate how senior managers can and in many cases do use their personal behavior to enact their brand throughout their organization.

But what if the brand is not clear? What if it is not clear how to enact the brand's attributes? What if it is not clear to an employee how he/she can maintain their individual identity (key to knowledge workers) and also be an active part of a corporate "brand personality?"

Based on our research these 'gaps" will erode the customer's loyalty. Brand is very important to the most loyal customers. Your brand, by their choice, is part of their personal identity. If the organization blurs its brand personality it has a similar and disturbing effet on the consumer's person. There is a price to be paid.

What is the solution? Organizations must articulate how their brand's personality translates (literally) into behavior. That is the organization must articulate the thought process that enables a person to generate the translation from "attribute" to "behavior." This thought process is a useful tool for employees.

So, what exactly is the process? Please check back for our next entry, or, as always, contact us at info@premiumknowledge.net.

Consumer Spending is Key

http://www.nytimes.com/2011/10/26/opinion/its-consumer-spending-stupid.html?nl=todaysheadlines&emc=tha212

In the Op-ed in the link, above, James Livingston of Rutgers points out that consumer spending is the key to economic growth. But where will this spending come from? It must first come from the top 25% of the U.S. households that account for over 50% of consumer spending. http://www.nytimes.com/2011/10/26/us/politics/top-earners-doubled-share-of-nations-income-cbo-says.html?ref=us.

But this does not mean that it should come from the top 1%. As we pointed out in an earlier blog entry (Underconsumption and Underemployment) the top 1% simply (physically) cannot spend enough of their earnings to have a meaningful impact. The spending must come from the remainder of the more affluent. Unfortunately they are either nervous about losing their job (and therefore are saving) or are experiencing declines in revenues in their small businesses or professional practices. The key will be to increase confidence in the government (and perhaps increase its spending) so that the overall population resume it normal practices.

And as Professor Livingston writes, we collectively need to stop "bashing" the fact that our economy is a consumer-driven economy. This is the positive result of the post-industrial period.