In Marketing, Think Outside the Niche

A funny thing happened to U.S. household income while marketers weren't looking: Its distribution curve changed dramatically. It used to be that incomes clustered intensely at or near the average level. A huge proportion of households, in other words, made essentially the same amount of money. Past that hump, the numbers of households earning at greater increments dropped off precipitously. But note the change since 1970. That cliff no longer exists; in its place is an attenuated slope. What this means for marketers is that a vast new space has opened up for offerings that were once not economical enough to pursue.

Under the old income distribution, there were two kinds of offerings: affordably priced mainstream offerings for the middle wage earner (think $2 toothpastes and toothbrushes) and luxury or professional offerings priced so high that only a very small number of buyers indulged in them (think $1,000 tooth-whitening treatments). For companies operating in any given category of goods or services, having offerings in these two distinct markets meant the marketplace was fully served. Now, however, there are enough people earning at increments between the average and the top incomes that many market positions in between are economically viable. (SpinBrush: $10. Whitestrips: $35.) Therefore, the company that still considers the markets of the very rich and the masses to be two distinct markets is undoubtedly leaving a lot of money on the table.

Despite the income increases many U.S. households have experienced during the last thirty years, their spending has not kept pace. The top quintile (households earning over $68,522 in 1984 and $84,016 in 2002, in 2002 real dollars) used to spend roughly 74 percent of their income. They now spend just 66 percent of it. As a result, the top-earning households now account for 49 percent of the total income in the United States, but only 37 percent of total spending. To be sure, the increased marginal utility of saving in a rising market explains some of that difference, as does the fact that higher-income earners are always in a better position to save. Possibly, some families who have been very well-off are suffering economic anxieties today and are being cautious about their spending. Still, the fact that consumption expenditures have lagged so dramatically behind earnings growth suggests a failure by marketers to address, or better stimulate, these households' needs and desires.

And where have marketers been looking, to have missed these broad market trends? They've been relentlessly focused on increasingly narrow segments of their customer base. For decades, marketing theory and practice have been moving toward the "market of one"; modern companies have learned to think in terms of "customer-centricity." Marketers have the tools now to separate out great customers from good customers from merely OK customers—and to focus their attention on the most valuable tiers. But in the single-minded pursuit of wallet share, they've failed to see the forest for the triage.

Even the few who have perceived the shift may have missed its import. What we are seeing is a ratcheting up of income levels—a new "mass affluence," as it's been called. At first glance, we might simply think that goods are being consumed in greater quantity or that prices of basic products are now rising in step with income. But what's happening is more fundamental than that. At a certain point, a saturation level is reached. Once our houses are warm, we don't make them uncomfortably hot just because we have the money. With such affluence, U.S. consumers don't buy more of what they already have, and they're certainly no longer concentrating on subsistence and fighting the elements. There has been a step change, and we are now operating at a higher level in Maslow's famous hierarchy of needs. If John Kenneth Galbraith was right in calling us an affluent society in 1958, then surely by now we are a mature or even postaffluent society. Whatever the terminology, we have entered a new era marked by a new psychology of selling and consumption. As with any societal shift, there are people in the vanguard, but we're at the point now that the shift is becoming a mass phenomenon.

Repositioning and the new middle ground
What does the new shape of today's market mean to consumer goods companies? For most of them, the best chances for growth lie not in increased microsegmentation but in an updated form of mass marketing—with its central tenets continuing to be scale production and sales largely to anonymous customers. Note that we are not recommending that managers simply return to traditional mass-marketing approaches. Rather, they should practice a new approach: one that looks to the basic components of mass marketing—positioning, the design of offerings, and go-to-market strategies—but that reformulates them with the new, moneyed masses in mind. (See the sidebar "Seven Ways to Tap the Mass Affluent.")

Let's start with positioning, where most marketers will recognize the conventional wisdom by its initials: STP. The order of business has been to segment customers first, then target the attractive segments, and then position offerings accordingly. It remains a reasonable approach, but the problem is, it can quickly lead to very small segments. And while those valuable customers will buy more enhanced offerings, the various enhancements will not add up to something with broad appeal. Rather than go down those rabbit holes, we're recommending that marketers try to make a positioning decision before they target and segment. We base that recommendation on a broad survey we conducted in 2002 of more than 3,500 consumers, who told us that when they shopped, they often found that they had to choose between products that cost less than they were willing to pay and were not satisfying their needs and products that were too expensive. They perceived a large gap, in other words, between the run-of-the-mill mass market offerings and the high-end luxury offerings.

Of course, that gap was always there, but consumers now feel it more. And ironically, the fact that consumers are chafing about it reflects that it is a smaller gap than it used to be. Here's why. Consider tooth-whitening solutions, in which the highest-end functionality two decades ago was a complicated and expensive capping procedure performed by dentists. Meanwhile, the category position where most toothpaste makers were competing was around a $2 price point. Innovation by the mass marketers focused on improving whitening performance, and that led to marginally higher price points. Tom's of Maine, with exotic ingredients like propolis and myrrh, now fetches about $5 per tube. Rembrandt is almost $8. But over the same period, dental centers were popularizing new bleaching techniques that put the price of a professionally brightened smile in the $400 range, as opposed to the $1,000 it might have cost before. At that price point, an offering is still not an everyday expense, but for the newly moneyed masses, it does become an option—and suddenly, the consumer is keenly aware of the middle ground between the two ends of the spectrum. Procter & Gamble moved into this middle ground first with its $35 Whitestrips. […]

How do you find a new middle ground in your own category? Here's an exercise that might help. First, identify all the benefits your existing offering delivers. Then consider all the really expensive high-end offerings out on the market that satisfy the customer needs that your product does. This expands the positioning map. (In their book Why Not?, innovation scholars Barry Nalebuff and Ian Ayres refer to this as imagining, "What would Croesus do?") Next, pick a price point that is substantially higher than your category's average (anywhere from two to ten times higher is a good start) but still below the high-end solution, and then imagine what you could possibly offer given the freedom to spend—on development as well as delivery—what these price points would give you. What unmet customer needs could be addressed, and what innovative approaches might be considered, if you were expecting to make that kind of money? This should lead to ideas like creating a $10 battery-operated toothbrush—positioned well below $60 rechargeable ones but well above the $3 or so upper limit for manual toothbrushes—as opposed to finding yet another way to angle bristles on a $2 brush. […]

Other companies are successfully selling status—that is, the privileged tier of service that once came only with loyal patronage. Rental car agencies were among the earliest companies to sell this better treatment outright, regardless of usage level, for an annual fee. Now companies from airlines to restaurants are following suit. It makes sense. Some customers who don't do a large volume of business with a company still value the extras enough to pay for them. In fact, customers with low usage levels who pay for recognition are potentially more profitable than loyal customers, who are likely to take fuller, more-frequent advantage of a company's perks.

Selling access in these ways is not without risks. Marketing academics have noted that the opportunity for such "discriminatory pricing" works best with goods and services that are frivolous in nature. Applying such pricing to items regarded as necessities is likely to spur a negative reaction from consumers. Indeed, our research confirmed that most consumers are somewhat uncomfortable with companies creating differentiated offerings in most categories. This may be changing, however. Hospitals routinely permit patients to pay extra for private rooms; some maternity wards offer suites to rival the Four Seasons.

Excerpted with permission from "Selling to the Moneyed Masses," Harvard Business Review, Vol. 82, No. 7/8, July-August 2004.

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Paul F. Nunes is an executive research fellow at Accenture's Institute for High Performance Business in Wellesley, Massachusetts.

Brian A. Johnson is a research analyst at Sanford C. Bernstein in New York and a former partner at Accenture.

R. Timothy S. Breene is Accenture's chief strategy officer and serves on the company's management committee.

Nunes and Johnson are coauthors of Mass Affluence: Seven New Rules of Marketing to Today's Consumer (Harvard Business School Press, forthcoming in 2004), from which this article is adapted.