November 9, 2010
By Ron Kurtz
Unity Marketing’s Pam Danziger has recently criticized the new research and conclusions about the luxury and affluent markets published by the highly respected Bain & Co. and the American Affluence Research Center.
I have always avoided direct criticism toward specific individuals and businesses that may be considered a competitor of the American Affluence Research Center (AARC).
However, I feel I need to make an exception in this case to defend the integrity of the research of the American Affluence Research Center and to counter Pam’s assertion that we have offered “dumb advice” that is “short-sighted.”
Pam’s opinions and theories about the luxury market and the luxury consumer are built on a very shaky foundation.
Good researchers will recognize the methodology of her survey research has at least three serious flaws.
In addition, she seems to lack an understanding of the numbers of people who can actually afford luxury products.
The latter point is clearly illustrated in her 2005 book, “Let Them Eat Cake,” in which she says “Luxury marketers don’t need to make …their products any less luxurious or….cut their prices to attract new customers with lots of market potential. The math very simply shows that the luxury market potential of consumers at….incomes $50,000 to $74,999 represents a large market of even greater potential…than do consumers with incomes of $75,000 and above.”
Even in 2005 this would have been incredulous.
As background and for clarification, the AARC research data is focused not on income but on the net worth of affluent consumers, consistent with the research of the Federal Reserve Board Survey of Consumer Finances, which we believe is the best source of data on the distribution of wealth in the United States.
The research of Thomas Stanley, author of “The Millionaire Next Door” and the recent “Stop Acting Rich and Start Living Like a Real Millionaire,” clearly demonstrates, as does ours, that net worth is a more important determinant of wealth and attitudes toward spending than income.
Pam believes there are 23.5 million affluent households, based on income, that represent potential for luxury brands.
However, the numbers on her Web site show that 60 percent of these households have an income of only $100,000 to $149,000 and another 21 percent have an income of $150,000 to $199,000.
This leaves less than 5 million households with an income above $200,000.
Does anyone believe a typical two-wage earner family in the income brackets under $199,000 can afford true luxury products?
The HENRYs to which she refers are essentially the same as the so-called “mass affluent” and “aspirational affluent” who were occasional buyers of luxury products but lacked the resources and credit to sustain such spending when the recession began and thus probably account for the bulk of the decline in sales experienced by the upscale retailers and brands.
And it might be important to note that a more reliable and accurate source – the Internal Revenue Service – reports only 10 percent of U.S. households, or 13.9 million, have an adjustable gross income of $100,000 to $200,000 and that about 3 percent, or 4.4 million, have an adjustable gross income of over $200,000.
As previously noted, the research methodology used by Pam and Unity Marketing has at least three serious flaws.
It asks survey respondents to remember and reconstruct what they spent for luxury products.
In the absence of having the survey participants maintain a daily diary, any good researcher knows such data is subject to considerable error and thus relatively unreliable.
What would you say if asked the amount you spent for luxury clothing during the past 90 days?
Equally important, Pam’s surveys do not define in an objective, quantifiable way the meaning of “luxury,” which certainly means different things to different people, and thus no one can be sure what the survey respondents are reporting.
AARC has conducted research that clearly demonstrates great diversity in how the affluent define “luxury” by price points and brands for 37 different products and services (http://affluenceresearch.org/popular-view-of-luxury-spending-debunked-in-survey-of-the-wealthy/ ).
It is also important that Pam’s surveys are conducted among online panels, the problems of which, especially for surveys of the affluent, have been the subject of many research industry articles (http://affluenceresearch.org/Dirty-Little-Secrets-of-Online-Panels.pdf).
One must question whether and why the truly affluent would join a panel and fill out lengthy questionnaires.
While there is room to disagree – hopefully with civility – on strategy, it is important to first analyze the correct data properly. It appears Pam has failed to do this before issuing her critiques.
Ron Kurtz is president of the American Affluence Research Center, Atlanta. Reach him at firstname.lastname@example.org.