Please accept all cookies to ensure proper website functionality. Set my cookie preferences

How do consumers decide what to buy? And how much money do they have to spend for what they want to buy?

Marketers have long tried to figure it out, and you're probably no exception in finding out that there haven't been any good answers. So you rely on things like household income data to measure the potential spending power of your prospects and customers. And, for a long time, that kind of "potential" was all that was available.

But today it is no longer enough if you are serious about targeting the right consumer, with the right product, at the right time.

Compounding the challenge is the reality of consumer "schizophrenia." Historically, consumers were more "class consistent" than they are today. Affluent consumers always bought premium, middle class bought value, and lower income bought on price. We marketers relied on that for a long time.

Those "truisms" are, quite simply, no longer true. Millionaires shop at Wal-Mart. And many people—perhaps more than ever—are living well beyond their means. The result is that you have to figure out not only who has spending power but also what they're willing to spend it on!

Spending power turns out to rely on a complex combination of forces that includes both sources of income and expenditure pulls. The percentage of influence each has can differ depending on the circumstances, but in the end consumers decide through a mostly informal analysis of the resources available to them and the conflicting demands on those same resources.

Traditional targeting solutions typically started with income measures (household, per capita, and disposable), followed by net worth (incorporating the value of assets held and subtracting major liabilities) and income-producing assets. While these solutions were initially considered "progressive" in that they provided the first level of discrimination of wealth in a previously homogenous world, it's now clear that these measures are constrained by the limitations of the underlying source data (e.g., 100,000 annual, self-reported consumer surveys projected to 114,000,000 households using ordinary demographics).

Compounding this challenge is that each measure provides only one component of the multi-dimensional puzzle of spending power.

Today, there is a way to effectively identify and target your best potential buyers. It starts with an understanding of the capacity to spend—a reliable and important indicator of the likelihood to buy because it is focused on discretionary income.

Discretionary income is the amount of funds left after consumers take care of the essentials such as food, clothing, and shelter. As Abraham Maslow, the famous psychologist who created "Maslow's Hierarchy of Needs" suggests, it is only after these needs are met that people begin to consider how to use their remaining discretionary dollars based on their interests and lifestyles.

Thus, two households that both have $250,000 in income and are in the same life stage may in fact have substantially different spending power and patterns, depending on their tastes, attitudes, where they live, and their financial asset base. These are the factors that determine what each consumer can or can't afford to buy and what they choose to spend their money on.

And while spending power is a powerful predictor of purchasing behavior, it's also true that how people spend their money and consume goods and services is linked to life stages such as marriage, children, life stages of children, moves, retirement, etc. For instance, two 40-year-old couples, one with two children under five and one with one high school-aged child, would have different pulls on their income resulting in different consumption and activities habits. Because of these individual differences, the "birds of a feather" approach at the neighborhood level breaks down significantly when trying to segment by age and income.

New approaches now exist that can allow you to improve targeting precision by identifying consumers with the income and the spending power to purchase your products and permit you to take a more holistic view of your consumer. But to have an impact, these approaches must be...

  • Multi-dimensional, incorporating income (not wages but disposable income) and assets (both monetary and equity producing tangible ones).

  • Significantly more granular than what currently exists. Saying a consumer has $150K-plus in income just doesn't cut it anymore.

  • Grounded in real data—sizeable, dynamic quantities of known transactions. Real facts matter more than educated guesses.

  • Continuous in its ability to score customers, rather than a large group classification system with no distinctions between the top and bottom of wide income ranges. You need more ability to make distinctions, especially at the top end.

  • Useable in the real world. You must be able to tag any customer-based dataset including customer records, survey data, standard US geographies, and marketing vehicles (magazine subscribers, TV/Radio/Web audience profiles, leisure, and local market activities, etc.)

Research shows that the three most discriminate components for predicting spending power are these:

  • Assets. Both liquid and non-liquid assets provide important information as to the spending power of a household.

  • Disposable income. Grounded in intuitive thinking that suggests $100K in a household in New York City is worth less in spending power than $100K in Kansas City, this variable provides both a regionality and urban density component and addresses the long-held and substantiated belief that "it's not what you earn, it's what you have left."

  • Home equity. The combination of an extended period of low-interest rates, rapidly advancing home values, and the lending community's aggressive efforts to help consumers put home equity to use in spending is fueling certain types of larger-ticket consumption.

When you have better information about consumer spending power, you can make better decisions. You can be more confident that your marketing dollars are being used to reach your best targets. And you thus make the most of your limited budgets.

Information has always been the key for marketers to remain competitive—and to pull ahead of the competition. But it has never been truer than today as competition increases, media changes, and sophisticated consumers become the norm.

Continue reading "Spending Power: The Driving Force Behind Purchase Decisions" ... Read the full article

Subscribe today...it's free!

MarketingProfs provides thousands of marketing resources, entirely free!

Simply subscribe to our newsletter and get instant access to how-to articles, guides, webinars and more for nada, nothing, zip, zilch, on the house...delivered right to your inbox! MarketingProfs is the largest marketing community in the world, and we are here to help you be a better marketer.

Already a member? Sign in now.

Loading...

ABOUT THE AUTHOR

James A. Koppenhaver is group vice-president of business development for Echelon Marketing Group, a division of IXI Corporation, based in McLean, VA. He can be reached at 847.808.7652 or via email jkoppenhaver@echelonmarketing.com.


MarketingProfs Partner