Life Style Marketing

Survival Strategies for the Upper Middle Class

Translating income into more productive forms of capital.

We have conducted enough research among affluent people (Househild income above $150,000) to recognize that, statistically speaking, there are two general strategies for redeploying current income into assets that will increase long term value.

One strategy is the reinvestment of current money into cultural capital. Cultural capital includes advanced education, broader understanding of the arts and sciences, greater interaction with other intelligent and educated people, etc. This strategy (stated in very simple terms) leads to positions of greater responsibility in corporations and to greater influence on the deployment of corporate capital. Along the way the successful person increases their wealth through rewards from the corporation.

The other strategy, again broadly speaking, is more individualistic, less reliant on cultural inputs and models, more oriented to concrete aspects of current human existence.This strategy is demonstrated in personal interests (e.g., more kinetic and measurable; less abstract and theoretical) as well in economic activities This strategy leads to greater accumulations of economic capital with less social or organizational intermediation.

These two broad strategies each have subsets but, in toto, are significantly different and based on very different values which translate into very different behavioral patterns.

We have spent most of our effort translating our research into strategies for organizations. We are now considering articulating the individual-level implications. If you would be interested in more information, please let us know. richard.baker@premiumknowledge.net

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 discretionary spending.

Ironically this turn of events has become a double-edged sword for a portion of the population 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 pillioried 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 eliminated .

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 vehicles 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 individual 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 philanthropies) that market to them.

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."

Customer Experience Management: Imagining the Customer's Point of View

There is a famous study of the affluent classes of France (http://en.wikipedia.org/wiki/La_Distinction) which provides great detail into affluent consumers' motives for the acquisition of disretionary goods and services. Distinction is a wonderful demonstration of how to present the point of view and behavior of different segments of the affluent market.

The point is made that each affluent consumer has an internal process, formed over time (a "habitus"), that guides their selection of activities and possessions. This "habit" forms the consumer's taste. The consumer's objective is to consistently add to their social capital in a manner they consider tasteful. There are significantly different "tastes" which produce different life styles.

Bourdieu (the author) points out that it is important for marketers to understand these habitual workings of the consumer's "mind" and the resulting life styles in order to present goods or services in a meaningful way.

Distinction not only reinforces the validity of our research capturing the LifeStyles of affluent U.S. consumers. It also sets the standard for writing up the results. This will be our objective in updating Material Differences.In the meantime, you will really enjoy Distinction.

Underconsumption and Underemployment

We are having difficulty getting our economy growing. One way to describe this phenomenon is "under consumption," an idea espoused by John A. Hobson, the English economist. (http://en.wikipedia.org/wiki/Underconsumption). His is an observation worth reviewing today in light of the increasingly unequal distribution of income and the concurrent out-sourcing of jobs to other economies.

Hobson points out that even when the rich have more money than they know what to do with, they physically cannot consume enough to replace the demand that would have been created by several other people with lesser incomes. A family with an income of $10M does not consume (i.e., spend) as much as one hundred families with $100,000 income each. Take automobiles as an example. The average $10M household may have 5-6 vehicles. One hundred families with $100,000 income would have an average of 2.5 vehicles each, or a total of 250 vehicles. That's a fifty-times increase in consumption based on the same total income.

As a result Hobson pointed out that the increasing disparity of wealth in a capitalistic system would, ironically, end up decreasing demand and initiating a down (read recession) business cycle. It appears this is where we are. The executives have earned their $10M salaries and bonuses by outsourcing or eliminating middle management and skilled positions. As a result they have fewer customers to serve in the US and have even more reason to focus on international markets for growth. They executives will point out they are required to do this by shareholders' relentless pressure to generate profits (potential dividends), or growth or both. This is today's Hobson's choice.

Singapore, Rolls Royce and the Practical LifeStyle

I noticed that we had some visitors to this site from Singapore. I have a couple of connections with people who might be in Singapore but have never been there myself. From reading I have a sense that Singapore and Dallas might have some things in common. Both cities are very conscious creations of a certain business-like approach to living.

If one were to describe a dominant LifeStyle that the two cities (one a city-state) share, it would probably be the Practical LifeStyle. In Premium Knowledge Group's original interviews and research, a person we ended up definng as a classic Practical LifeStyle person was a real estate developer who started with nothing and became worth millions. In the process he never lost his awareness of how fleeting his growing success might be and how vigilant he must be for the success to continue.

In his interview he recalled that after achieving a certain level of success he purchased a Rolls Royce. The day he drove it from the dealership, he pulled off to the side of the road and cried. He had accompished a life-long desire.

He turned down an opportunity to go to Crewe and pick up the car. It was interesting why he declined. He said he had a vision in his mind of the lady hand-wrapping the leather onto the steering wheel frame and he did not want to find out that his picture was not true. The Rolls was not an indulgence. It was a trophy from a dangerous game.

Why do we call this LifeStyle, which might reward itself with a Rolls Royce, the Practical LifeStyle? Because under the appearances of wealth is a tangible sense that at any moment, if one is not really focused and vigilant, the success could vaporize. The hunted animal could turn. The hunter could quickly become the hunted.

And this is a sense, I think, that the leaders (often behind the scenes) of both cities share.

Self-made Wealth

Our research shows the vast majority (over 80%) of today's wealthy are self-made. Most of the analysis of this group focuses (perhaps,  fixates) on the "wealth" aspect of their accomplishment:  How they made and how they spend their money.

I am also intrigued by the aspect of being "self-made." I believe this perspective has significant marketing implications.

Any discussion of  "self-made" benefits from an historical perspective. At a minimum, it requires appreciation of the history ("life story") of the individual and his/her accomplishment. One can look at individual's progress from the outside, at the sequence of events leading to the financial success. This is the MBA version. It provides a case history of what to do to become wealthy. It doesn't provide insight into being comfortable with the success ("Be careful what you wish for.").

Most of the newly wealthy, coming from middle class backgrounds, are self-conscious about how to think and behave in their new circumstances. Why?

Being "self-made" is a relatively new (historically speaking) human phenomenon. A reading of  Fernand Braudel reveals the recency of significant upward mobility in Western society. (One never rose from serfdom to royalty.) Fernand's work documents the tenuousness of the hold on the high perches. (We see this today in the turnover of names in the Forbes's lists.)

The majority great ideas and plans never reach the light of day, at least not in the lifetime of the developer. The aspiring person who actually "makes it" is a survivor of an socio-econoimic  process whose odds of success are akin to the chances of a individual sperm fertilizing an egg: A million failures accompany one success. Awareness of these odds results in the survivor having an attitude that can range from hubris to humility. You either brag about being a good swimmer or, like Ulysses,  you thank the gods that washed you ashore

The ability of a human to think of changing his lot in life, to conceive that such a transformation is possible, is "new."  Harold Bloom dates this psychological development to Elizabethan times and suggests that Shakespeare was the first (and best) to articulate the internal dialog that accompanies it. For the preceeding tens of thousands of years humans' future was fated. For the last 500 years success is a play rehearsed  in the mind then acted out on life's stage.

So what's the connection to marketing luxury products and services? 

The newly wealthy approach the consideration of luxury goods and services with an eye to more than aesthetics, pleasure, value or status.  Among all the other questions is the one: "Who am I that I own/drive/fly/drink/eat/wear/etc. and have this rare experience?"

After making their fortune they must make sense of themselves and their new situation. Shakespearean characters engage in a soliloquy about who they are and the meaning of life  while holding a dagger, a skull, a chalice or some other prop. Today's self-made person has the soliloquy while holding the wheel of the new Bentley.

The luxury brand must be capable of a dialog. It must convey individuality and meaning. Its very presence must articulate why it, too, is the survivor of an equally Darwinian process and worthy of being in the front seat with the driver.   

The Sky's the Limit

The Sky's the Limit is a new book about the "elite affluent." The major findings are about two sub-sets: Those with >US$10M in net worth and those with >US$20M in net worth. The book will repay with interest the time you invest in reading it.

The book has several features luxury marketers will value. Four come immediately to mind. The book:

1. Is based on original research (by Russ Alan Prince) about very salient topics.
2. Provides hard data about very hard-to-reach-and-research audiences.
3. Recognizes the wealthy have a variety of life styles and cannot be dealt with as if they were homogeneous.
4. Suggests significant marketing implications based on its findings.

As you know from other entries in this blog, the four main points above are ones that Premium Knowledge Group's research generally agrees with. Our findings definitely support Life Style marketing (hence the title of the blog), a comment made in the spirit of a genuine endorsement of The Sky's the Limit.

I have admired the previews of Russ' research that Doug Gollan has provided in Elite Traveler. And Doug has contributed to the book, too. He knows this audience so well as evidenced in his crisp news letters and editorials from around the world. (As I write I think he is on his way to Moscow.) If you don't have a jet you must get one so you can get your personal copy of Elite Traveler on a regular basis.

I must apologize to the other co-authors for not knowing more about them and their contributions. But they must be talented since they are in such good company.

If I can whisper a caveat to the reader it is to remember that not all the very wealthy choose to own (whole or in fractions) private jets. I think the jet card companies and the charter jet companies would agree. So the research's sample is somewhat biased (as noted in Appendix B) and not necessarily projectable to the overall >US$20M population.

But this technical point does not diminsh the unique value of the research or the great readability of the book. This is a one-time window into the world of the truly wealthy. If you serve the very high end of the luxury market, you should read The Sky's the Limit as soon as possible. It should influence your marketing strategy beginning with your 2008 budget.

And thanks again to Russ, Doug and co-authors for a great contribution to our growing industry.

All the Money in the World

Several months ago I received a call from Paul Berger, a writer working as part of a team on a book about the Forbes 400. I was intrigued by the approach Paul described and said I would look forward to the book.

Well, the book is out and definitely worth the investment of your time. Unlike many scribblings about the wealthy this well-researched effort delivers insights not inflamation.

All The Money in the World describes how many of the 1000+ people on the lists (over time) became wealthy. Just as important, it describes how they spend, invest and give away their wealth. Since the authors have researched various Forbes' lists as well as other sources, there are very interesting comparisons between now and earlier times. There are comparisons of the 400 along almost every conceivable dimension: education, gender, country of origin, number of years on the list, etc.

The book can leave the impression that the variety among these folks (and families) is almost infinite (well, 400 x the total number of dimensions described) and there is no usable pattern to leverage from a marketing point of view. We were left with another sensation. 

The book reinforces our central theme that there are recognizable LifeStyle differences among the wealthy and that marketing to them requires a familiarity with the implications of the differences. The book offers clear examples of each LifeStyle. (We noted the references to the Hunt family, a topic of a few blog entries.)

Over the next several entries I will make reference to the portraits in All the Money in the World and the LifeStyles I see captured. Hopefully you will read along with me.

Wealth, LifeStyle and Philanthropy

There is a great piece of reporting in The New York Times which illustrates the connection between LifeStyle and choices about philanthropy.

The article (one in a series about The Age of Riches) shows the distribution of charitable giving across recipient categories of Arts, Health, Universities,  and Other (private foundations).

The quotes from Eli Broad and Tom Siebel (among others) show that well-intentioned people are driven by different motives when voluntarily parting with their money. And, as the quote from Tom indicates, the wrong kind of gesture can drive them away.

From a luxury marketing perspective you are most likely to reach Eli or Tom by working with very different types of non-profits and by working with each of them in a specific way.

Our data (which is provided by wealthy people on the boards of non-profits) indicates a LifeStyle pattern in consumption of brands that mirrors the pattern in types of charitable causes supported.

As a luxury marketer you will be approached by many, many non-profits for contributions. There is no doubt that some level of giving is socially responsible. The selection of the particular cause to support with corporate dollars can be fiscally responsible.

Do well by doing good.