Among the many challenges of managing a business is accurately assessing the overall business attractiveness of various market segments. Due to a variety of factors, over the last few years, selling to the (very) affluent and upper-income consumer segments has proven to be successful for many companies. This success reinforces what appears to be a widely-held general perception that selling to affluent consumers is highly desirable, in part because affluent market segments tend to be less price-sensitive.
On February 2, the New York Times published an article titled “The Middle Class Is Steadily Eroding. Just Ask The Business World.” This article discusses consumption dynamics of various income classes, and the ramifications – and reactions of businesses.
More broadly, about 90 percent of the overall increase in inflation-adjusted consumption between 2009 and 2012 was generated by the top 20 percent of households in terms of income, according to the study, which was sponsored by the Institute for New Economic Thinking, a research group in New York.
The effects of this phenomenon are now rippling through one sector after another in the American economy, from retailers and restaurants to hotels, casinos and even appliance makers.
This article implies that companies are increasingly gravitating toward targeting more affluent consumers, given the overall consumption dynamics mentioned above.
However, from a pricing perspective, the issue arises as to how resilient pricing power in these affluent market segments will be going forward, especially given – in many cases – that prices have been (steeply) rising over the last few years.
The Wall Street Journal article of today (March 3, 2014), titled “Soaring Luxury-Goods Pricing Test Wealthy’s Ability To Pay,” discusses various issues and dynamics concerning luxury goods pricing.
A couple of excerpts:
Despite expanding into new markets, the luxury-retail business has been relying on price increases to drive sales. Now, even the very wealthy are nearing the limits of what they are willing to spend.
But there are also signs that price increases are starting to wear thin with Western customers amid heightened competition from more-affordable brands.
“Luxury brands are at risk of losing customers who cannot or do not want to pay more,” said Claudio D’Arpizio, a partner with consulting firm Bain & Co.
As seen in the Wall Street Journal article mentioned above – as well as a variety of other confirmations – it appears as if the affluent and upper-income consumer segments are – in general – becoming more price sensitive. This trend is being driven by many different factors, some of which are complex. While the implications for companies selling into these upper-income segments is clear, there are likely implications for all companies, especially regarding pricing power and demand/pricing dynamics.
ProfitabilityIssues.com is published by StratX, LLC (stratxllc.com). StratX, LLC is a management consulting firm and strategic advisory that focuses on the analysis of current and future business conditions, and given these conditions, offers corporations and businesses advice, strategies, and actionable methods on how to optimally increase revenues and profitability.