The Luxury Consumer Market:A Wealth of Opportunity

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The Luxury Consumer Market: A Wealth of Opportunity

“These new customers for luxury are younger than clients of the old luxe used tobe, they are far more numerous, they make their money far sooner, and they arefar more flexible in financing and fickle in choice. They do not stay put. They nowhave money to burn. The competition for their attention is intense, and theirconsumption patterns-if you haven't noticed- are changing life for the rest of us."—James B. Twitchell1

As Professor James Twitchell insightfully observes, the modern concept of luxuryhas been “democratized” and marketed to a wide swath of the consumerpopulation. From clothing to cosmetics, watches to a wine, vehicles to vacationtravel, luxurious indulgences are no longer reserved solely for the likes of theRockefellers or Rothschilds. In a society where financial and social bettermentare widespread and attainable goals, luxury marketers are in the enviableposition of being able to sell their goods and services to an ever-expandingmarket of affluent families and individuals.

But how large is the luxury market? That, of course, depends on the luxury beingprovided. For example, a middle class household with a penchant for some of thefiner things may occasionally splurge on a $2,000 watch or a $7,500 hometheater system, but only those with a much higher degree of affluence will beable to spend $2 million or more on a luxury home or purchase a $75,000automobile. Even fewer can afford the penultimate luxuries of private jets andsuper-yachts.

Targeting the Right Clientele

As it does to many social and economic situations, Pareto’s Principle, or the80/20 rule, applies very well to the luxury consumer market: 80% of sales andprofits tend to come from 20% of customers. Quality management guru Dr.Joseph Juran referred to this phenomenon as the "vital few and trivial many."Identifying that “vital” 20% is absolutely crucial for the luxury marketer.

Indeed, at the heart of successful luxury marketing is the ability to identify anddevelop lasting relationships with that exclusive but dynamic group of people whoare willing and able to spend more on a cocktail dress or piece of jewelry, for 1 James B. Twitchell, Living It Up: America's Love Affair with Luxury, Columbia University Press,2002, p. 272.

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example, than many people spend to buy a car—or, for very high-end marketers,to find those willing to spend on a car what others would on a house.

Successful companies—and especially those that serve luxuryconsumers—expend no small effort in seeking to identify their “sweet spot” oftarget consumers. This means using market research to quantify and segmentthe consumer population in order to focus on the consumers whom they canmost profitably serve.

The goal of this report is to provide marketers with insights into the luxury marketby presenting the best and most authoritative research that describes andquantifies the demographics of the luxury consumer. The focus is on the variousclassifications of the luxury consumer, rather than on the specific luxury productsthey buy.

Differing Definitions

''The luxury market is not a matter of what something costs,'' observes Bill Curtis,chief executive of CurtCo Media, publisher of the luxury lifestyle magazine RobbReport. ''It's a matter of the entire visceral and emotional experience attached toit. It is about being inspired by products and services, whether that means hotels,boats, cars, or jewelry.”2

As Curtis observes, luxury is not confined to a particular price point. Nor, for thatmatter, are luxury consumers confined to a singular level of wealth or income.The body of luxury market research mirrors this multifaceted approach tounderstanding just who classifies as a “luxury consumer” and the correspondingsize of the opportunity.

Some researchers take an inclusive approach and consider households withminimum annual incomes of $75,000 to be luxury consumers, while others aremore exclusive and focus only on the part of the population with $1 million ormore in investable assets.

Taking the Broad View

Some prominent luxury market research firms reflect the increasingly mass-marketed nature of luxury. Unity Marketing and Mendelsohn Media Research,Inc. a subsidiary of Monroe Mendelsohn Research are two of the mostrespected outfits taking this approach, and use government data such as theBureau of Labor Statistics’ Consumer Expenditure Survey or the U.S. CensusBureau’s Current Population Survey to measure the size of the luxury market.

2 Schiesel, Seth, The New York Times, “Finding Glamour In the Gadget,” April 15, 2004 p. G1.

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Of the 112 million households in the most recent (2002) Consumer ExpenditureSurvey, BLS breaks down household incomes into the following equally sizedquintiles, each with approximately 18.5 million consumer units:

Quintile AverageAnnualIncome

LowerIncomeLimit

Lowest 20% $8,316 —Second 20% $21,162 $14,599Third 20% $36,989 $28,344Fourth 20% $59,177 $46,507Highest 20% $121,367 $74,392

Pam Danziger, president of luxury research and consulting firm Unity Marketing,defines the luxury market as those households with annual incomes above theminimum for the top quintile—approximately $75,000. Within the top quintile, shefurther segments the households into three income categories

• Near Affluents: $75,000 to $99,999 (12.2 million households)• Affluents: $100,000 to $149,999 (10.1 million households)• Super Affluents: $150,000 and above (5.6 million households)

Population estimates used by The Mendelsohn Affluent Survey are ‘comparable’to the Current Population Survey estimates and employs a similar triplesegmentation to Unity and the BLS, but with a broader range of income for themiddle segment:

• Least Affluent: $75,000-$99,999• Middle Segment: $100,000-$199,999• Most Affluent: $200,000 and above

Even though Mendelsohn and Unity both focus on the “mass” luxury market, theiranalyses of the income data still hint at a degree of exclusivity in the luxuryconsumer market. For example, Unity observes: “Of the total 111 million U.S.households, approximately 27.9 million, or one-quarter, have an income of$75,000 and above. At $100,000 and above, there are approximately 15.7 millionhouseholds, or 14% of households.”

Also, the 2003 Mendelsohn survey notes the government’s estimate of total U.S.household income to be $6.44 trillion. Mendelsohn’s own estimate of total incomefor affluent ($75,000+) households is $4.04 trillion. Therefore, 25% of all U.S.households account for 63% of all U.S. household income. In addition, 37% ofaffluent heads of households live in households with total assets of at least $1million.”

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Income vs. Wealth

Defining the luxury market by household income is useful for marketers of “massluxury,” but in some industries—such as high-end real estate, private banking,yachts, and private jets—targeting customers by level of wealth is a moreappropriate strategy. Wealthy families and individuals may be more appealing tothese types of marketers because of the degree of financial security andwherewithal associated with high levels of wealth.

Although there may be a high degree of overlap between groups of targetcustomers selected for their level of wealth, and those selected for their level ofincome, one compelling reason to target the wealthy is to cultivate deeper andmore profitable long-term relationships. Mass luxury marketers such as those inindustries like high-end consumer electronics or even automobiles are moretransaction oriented than financial industries like private banking and investmentmanagement, where fees and compensation are usually based on a percentageof assets under management. In these cases, the relationship, and not individualtransactions, determine profitability—the higher the level of assets undermanagement, the more profitable the relationship.

Sizing Up A More Exclusive Market

While government reports work well in forming a basis for segmentation of themass luxury market, several research firms focusing on quantifying anddescribing the wealth market use their own proprietary research.

The American Affluence Research Center focuses on asset wealth—inparticular, the wealthiest 10% of U.S. households. Twice a year, AARC surveys asample of these households in order to profile trends in values, lifestyles,attitudes, and purchasing behavior.

These wealthiest 10% have an average annual household income of $359,000,and as a group, they control 70% of the private wealth in the U.S. Net worthaverages $2.7 million for these 11 million households, and they hold 85% of thevalue of all publicly traded stock and stock mutual funds in the U.S.

Looking at wealth from a global perspective, one of the more preeminentresearch firms is Prince & Associates headed by author and consultant RussAlan Prince. Several top financial institutions rely on Prince’s research andanalysis to help them target affluent clients. Accordingly, Prince segments andquantifies global households by their amount of assets. Here is how he breaksdown the “wealth” market worldwide:

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Level of Affluence Wealth Range Number ofFamilial Units

Low-End Affluent $1M to $5M 16,712,000Affluent $5M to $25M 531,610Supra-Affluent $25M to $150M 58,990Mega-Affluent $150M to $500M 7,640Maxi-Affluent $500M + 1,940

Prince classifies the top three levels of affluence (supra-, mega-, and maxi-affluent) into the category of “ultra affluent,” or those households with investableassets in excess of $25 million. To get an idea of the importance of these clientsto financial institutions and investment advisors, consider a management fee of2% of assets. For clients with $25 million under management, annual revenue is$500,000—or 10 times the revenue from a client with $2.5 million undermanagement.

Another frequently cited source for measuring the global wealth market is theannual Merrill Lynch / Cap Gemini World Wealth Report, which provides adetailed look at the world’s wealthy households. Merrill Lynch and Cap Geminidefine levels of wealth based exclusively on financial assets, which excludes thevalue of the principal residence and collectibles. The wealthy are grouped intotwo categories:

• High-net-worth individuals (HNWI): People with financial assets of at least$1 million

• Ultra-high-net-worth individuals (UHNWI): People who have financialassets of more than $30 million.

According to the most recent (2004) World Wealth Report, the wealth of high-net-worth individuals grew 7.7% to $28.8 trillion in 2003. The total number of high-net-worth individuals globally grew by 7.5% to 7.7 million people, and the worldpopulation of ultra-HNWIs to 70,000 people. In the United States, the number ofHNWIs grew 14% to 2.27 million people in 2003. Merrill Lynch estimates thattotal HNWI wealth globally will grow by 7% annually and it is expected to pass$40.7 trillion by 2008.

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Measuring the Market of Luxury Consumers

Organization Household IncomeRange

Net Worth Range WealthTerminology

$75,000-$99,000 — Least Affluent:

$100,000-$199,999 — Middle Segment

Monroe MendelsohnResearch

$200,000+ — Most Affluent

$75,000 to $99,999 — Near Affluents

$100,000 to $149,999 — Affluents

Unity Marketing

$150,000 + — Super Affluents

— $750,000 -$1,499,999

— $1,500,000 -$5,999,999

American AffluenceResearch Center

— $6,000,000 +

— $1M to $5M HNWI

— $5M to $10M HNWI

— $10M to $20M HNWI

— $20 to $30M HNW

Merrill Lynch / Cap Gemini

— $30M+ UHNW

— $1M to $5M Low-end affluent

— $5M to $25M Affluent

— $25M to $150M Supra-affluent

— $150M to $500M Mega-affluent

Russ Prince & Associates

— $500M + Maxi-affluent

Considering Real Estate Wealth

Although several of the top researchers into the affluent market exclude the valueof a primary residence from their calculations of wealth, luxury marketers mayfind tremendous value in focusing only on home values. In general, the morevaluable the home, the higher are the income and wealth of the homeowners.

According to Harvard University’s Joint Center for Housing Study, “Million-DollarHomes and Wealth in the United States,” the median income for owners of“million-dollar” homes in the U.S. in 2001 was $469,000. In contrast, the medianincome for all homeowners was $51,000 per year.

A particularly exclusive demographic profile is found among families who own ahome valued at $2.5 million or more. A survey released in the fall of 2003 by TheInstitute for Luxury Home Marketing and Unique Homes magazine finds that thetypical owner of this type of home “is married; under age 55; works as a top

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corporate executive, business owner, or self employed professional; makes amillion dollars or more annually; is ‘new’ money…and owns multiple residences.”

In addition to serving as a reliable proxy for wealth, home values also representpurchasing power in their own right. Given the widespread use of home equityloans and flexible loan structures in the past several years, homeowners withsubstantial equity can easily tap into the value of their home to access additionalfunds for spending and investment.

Considerations for Luxury Marketers

The luxury market is not a singular entity, but several large and growing groupsof luxury consumers. There are multiple definitions and demographic profiles ofwho they are. The most appropriate strategy and demographic focus depend onthe unique objectives of individual luxury marketers. Here are some points toconsider:

• As a company, you must define your brand and your value proposition notonly through the products and services you provide, but also by definingthe most important “affluence aspects” of your target market. Is it aparticular level of income or a particular level of assets? Which makesmore sense for your company? Effective segmentation is one of the keysto successful luxury marketing.

• Every company has its own 80/20 rule. Identify that important 20% whomake up 80% of your sales and profits. These customers are your mostloyal and loyal customers are better customers because they are easier todeal with and more profitable to serve. They are also the best source ofnew referrals since they’ve demonstrated that they enjoy doing businesswith you, and they will want to tell their friends and family about you.

• The most important action that luxury marketers can take is to build andmaintain an in-depth understanding of their clientele -- their needs andwants, and how these evolve over time. Next, they must profile theirhabits, their spending behavior, and their motivations for spending. Andlastly, take every opportunity to ask them what they want and what theylike best (and least) about your company.

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The Luxury Institute

As you dive into understanding your luxury consumers and finding the rightmethods to attract and retain them, the Luxury Institute will provide you withaccess to the best available research into the luxury market. We also deliver toour members timely, actionable reports outlining best practices in luxurymarketing.

The luxury market is large. It is also dynamic. With the right marketing strategiesbacked up by effective execution, it is also extremely profitable and rewarding.

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Sources

• The American Affluence Research Center, Wealth In America: Semi-AnnualSurvey Of Affluent Americans, Spring 2004.

• Consumer Expenditure Survey, February 2004.• The Institute for Luxury Home Marketing• Mendelsohn Affluent Survey 2003.• Merrill Lynch/Cap Gemini Ernst & Young, World Wealth Report, 2003 and

2004.• Russ Alan Prince and Richard L. Harris, Advanced Planning with the Ultra

Affluent: A Framework for Professional Advisors, Institutional Investor, 2002.• Unity Marketing• Zhu Xiao Di, “Million-Dollar” Homes and Wealth in the United States. Joint

Center for Housing Studies, Harvard University, January 2004.

For more information please contact The Luxury Institute at 646-792-2669 or visitour website at www.luxuryinstitute.com.