Customer Growth Strategy · Customer Insight · Growth · Luxury · Retail

Luxury Market Research Smackdown

A number of media outlets have picked up on the debate between Pam Danziger of Unity Marketing and Ron Kurtz of the American Affluence Research Center (AARC) concerning the future of the luxury market.  Let me boil it down for you.

In a recent AARC report Kurtz recommends that: “Luxury brands and luxury marketers should be focused on the wealthiest one percent because they are the least likely to be cutting back and are the most knowledgeable about the price points and brands that are true high-end luxury.”

Danziger fired back “This is just plain dumb advice for luxury marketers.” She goes on to suggest that “the top one percent of the market (about 1.2 million households with average incomes of $500,000 and above) simply can’t carry the entire weight of the luxury industry.” Instead, she recommends that the luxury industry cast a much wider net, aggressively going after the so-called HENRY’s (High Earners Not Yet Rich) to energize significant future growth.

So who’s right?  Well, neither one, exactly.

Kurtz is right that the most elite segment has the greatest capacity and willingness to spend on luxury. But for virtually all but the most rarefied luxury brands, it would be an unmitigated disaster to focus only on the top 1%.  As the former head of strategy and marketing at Neiman Marcus, I can assure you that customers outside the top 1% contribute a very significant percentage of sales and profits.   And if you are Saks, Net-a-Porter, Gilt Group, Louis Vuitton or Gucci, I doubt it’s much different. Most luxury brands need the truly rich and the merely affluent.

So Danziger is right that most luxury marketers need to attract a wider demographic. But she goes too far.  First, while there are many more of the HENRY’s–and their aggregate spending is significant–as you move lower in income the number of potential customers goes up, but their spending on luxury drops dramatically.  Trust me on this: I’ve seen actual, recent spending data by percentile, and the difference between a 99% percentile and a 90th percentile customer’s luxury spending is vast.

The second issue is one of positioning.  The more a brand’s target customer group becomes diffused, the harder it is to be relevant, differentiated and compelling across each distinct consumer segment.  As brands aggressively court a wider demographic they risk alienating their historically strong elite core.

Like most things in life, the answer is not black and white.  It is rarely true that brands need to focus on only one segment.  A compelling customer growth strategy can be built on multiple customer groups.  The needs and value of each segment must be well understood and segment specific strategies designed and integrated to create a powerful blend.

But the starting point is a solid understanding of your customer base.  And apparently that starts with sifting through what the facts actually say.

I’m reminded of the lyrics from the Talking Heads song “Cross-eyed and Painless.”

Facts are simple and facts are straight
Facts are lazy and facts are late
Facts all come with points of view
Facts don’t do what I want them to

7 thoughts on “Luxury Market Research Smackdown

  1. Steve,

    I think focusing on the top 1% is pure STUPIDITY and a business model that would lead to financial ruin for many luxury brand companies.

    I know LOTS of folks, especially here in Dallas, that are credit card millionaires. They don’t make the money but they sure do try to “look the part” and buy luxury brands aplenty. They are “aspirational” spenders and, in my opinion, the key between some of these brands existing altogether. They are the difference between being “in the red” and being “in the black” and profitable.

    With no income taxes and affordable housing vs. other major metropolitan markets, Dallas is known for having more disposable income, which leads to more discretionary spending. We see this behavior all the time here, no?

    As we can see from Wikipedia, $100k or more puts folks in the top 6.25% of income earners in the U.S. Does your data coincide with the census bureau data?

    http://en.wikipedia.org/wiki/Personal_income_in_the_United_States

    I can attest from personal experience that some luxury brand companies are going to get pinched here at some point. At least the ones that are raising prices at astronomical rates. I like shoes…. I’ve currently wear some Santonis, Ferragamos, Eccos and Allan Edmunds. I’ve bought these over the last 4-5 years. Over the years I have found that to be my #1 luxury indulgence. That and great ties from Saks or Nordstrom’s seem to get the most compliments 🙂

    In the last 2 years I’ve seen the price of the 1st two shoemakers jump by $150 – $200 per pair or 30% plus. I won’t be buying either of them anytime soon and I’ll do everything I can to keep the ones I have in good condition.

    How much of luxury profits today (and their rebound) are driven by unit growth vs. higher prices? Perhaps we could see some with lower unit sales but more profitability due to higher avg selling prices?

    Dan Ross
    @BetterBizIdeas

  2. Like Pam, you have jumped to a false conclusion about what I said (and meant). I never thought anyone would interpret my recommendation to “focus” on the wealthiest one percent as meaning that all other segments of the affluent should be ignored or excluded.

    To me, “focus” (which the dictionary defines as “concentrating attention or effort on”) means giving priority. As a result, you have inadvertently given support to my emphasis on the importance of clearly defining words such as “luxury” (in an objective and quantifiable fashion for each product category) and “wealth” (in specific quantifiable terms based on income or net worth). Without such definitions (and you have given none) the commentary in this “debate” lacks substance, meaning, and perhaps relevance.

    You say that your experience at Neiman Marcus showed that customers outside of the top one percent contributed a significant percentage of sales and profits. I don’t doubt that members of the top five percentile (based on net worth) also made good contributions. Perhaps the 90 to 95th percentile and even the so called “mass affluent” made some contributions to sales before you left NM, but the recession has “taken out” much of the latter group and thus probably accounted for most of the decline in sales of NM and Saks during and since the recession.

    You ask that we trust that you know what you are talking about because you have seen recent spending data by percentile that shows the differences between the 99th percentile and the 90th percentile are “vast” (your words, which almost sounds like the research supports my position). Given all the research we have seen, I prefer to see more of your detailed data rather than trusting you.

    I concur with your second point about positioning, which is especially critical for high end luxury products where exclusivity is usually an important element of their appeal. I do not agree that brands rarely need to focus on only one segment. Too often brands feel they can extend their product lines and market segments and then find they become ineffective in staying on course with their products and image and thus fail in keeping their different market segments happy. This is particularly costly if the consumers that made up the original foundation of their business are lost.

    I regret that you have introduced this “debate” in to new channels. In an effort to avoid creating the impression that potential competitors were simply engaged in self-promotion (perhaps by debating some technical research issues), I had responded to Pam only in those places where she had posted her comments.

    I am not trying to have the last word, but I feel I must respond when this discussion is added to new channels.

    I’m not sure the lyrics of the Talking Heads are applicable, but it is clear to me that the facts show the wealthiest one percent (based on net worth) have the most resources and inclination to spend and, equally important, the most knowledge and appreciation of high end luxury products.

    In a difficult and competitive environment, I would want to concentrate my attention (i.e. focus) on those consumers.

  3. I really don’t have the desire to extend this debate in this forum or defend why I might know what I’m talking about–I will let my experience speak for itself. So I will just add one further point.

    Regardless of the semantics of the word “focus,” the single biggest mistake Neiman Marcus made PRIOR to the recession (in my view) was not focusing enough attention on–and effort against–those customers outside the top 1%. While we did increasingly better with the top segment for many years–precisely because we focused overwhelming on them mostly to the exclusion of other valuable segments–our positioned weakened with important secondary segments. For years this was masked by the luxury industry’s ability to grow comp. stores sales through prices increases, rather than growing the customer base and/or transactions. This ultimately left “mainstream” luxury brands incredibly vulnerable to an economic downturn.

    Ron is entirely right that AFTER the recession the groups between the 90th and 99th percentile had the biggest declines–and I absolutely agree that they will be much harder to woo back than the top 1%, the implication being that brands must be very careful deciding how much attention and effort they deserve.

    If you are Ferrari, Harry Winston or Gulfstream, it makes sense to me that you should focus on the top 1%. Most other luxury brands, however will need to focus on the Ultra High Net Worth customer AND “the working wealthy.” They need to walk and chew gum at the same time. Detailed segmentation and deep customer insight will reveal precisely how resources should be allocated and which specific customer-centric strategies should be employed.

  4. Steve, I think one other part of any discussion re: “luxury” is how much the product costs.

    I think < $1000 is within the reach of most "working wealthy" people for an item, especially if it is something they might retain for years and will remain stylish / timeless.

    Shoes, ties, shirts, accessories, purses…. all fit this category. People can afford the high-end product and "splurge" from time to time.

    Suits begin a higher price point (speaking from a man's perspective here). I would say watches are a highly discretionary item that people have spent money on that are very volatile in a tougher economy. The working wealthy might blow some of their bonus on such items. My Cartier back in 2001 is a classic case 🙂 Still love the watch and get tons of compliments on it to this day.

    Then, when you mention the above items (Ferrari, Harry Winston, Gulfstream, etc), those are for the top .5% of income earners. Those items are ULTRA RICH items). For those items, I'd focus my $$$ and SERVICE on the top .5% WITHOUT question.

    I think retailers need to look at their sales based on price points. Certain price points / items are more exposed to "working wealthy" than others and, if a retailer increases their exposure to this segment than greater volatility might occur.

    Which then goes back to SERVICE.

    Neimans, Nordstrom, the brands you spoke about above. All of these items have to deliver service. I think people are more willing to try new retailers, brands, etc. when existing high-end retailers / brands don't deliver on the image and expectations the customer has in mind.

    I've had two poor experiences in the last 2 weeks with higher price point restaurants / retailers; my $$$ will be going elsewhere moving forward because somehow, during this recession, they have forgotten that I pay a HUGE premium when I get great service. I EXPECT great service for the premium's that are being charged.

    Dan Ross
    @BetterBizIdeas

  5. Excellent discourse, thanks for the perspective Steve.

    The truth is somewhere in the middle. Any brand worth their lineage and reputation will create a wisely, if not lightly, diffused strategy to communicate with UNW individuals and their Henry’s brethren to survive in this challenging economy. A strong CRM with high-touch and a bit of high-tech innovation will serve their audiences well. Luxury needs to look beyond today and start to envision what they want to mean tomorrow.

    http://www.twitter.com/glennlux

  6. Hi Steve,

    I think this is a very informative article, and to back up your views, I think that brands such as Ferrari do market outside of the top 1%. I may not be buying a $200,000 car , but how many racing fans buy Ferrari clothing?

    Ultimately, their focus is on the super cars and the likely buyers, but there is no harm capturing the attention of potential affluence that lies in other areas (including children and their toy cars!)

    Mark

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