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Best Customers: Demographics of Consumer Demand - 2nd ed.
New Strategist Publications, Inc., Jan 2001, Pages: 730
Best Customers is a unique examination of how changing demographics are reshaping the consumer marketplace. It reveals who the best and biggest customers are for hundreds of individual products and services, alerting marketers to potential booms and busts in the years ahead.
Based on data from the Bureau of Labor Statistics' 1997 Consumer Expenditure Survey, Best Customers examines spending patterns by the demographic characteristics of households. For most consumer products and services, demographics drive demand. Best Customers analyzes household spending on 300 products and services by age of householder, household income, household type, and region of residence. It identifies which households spend the most on a product or service (the best customers) and which control the largest share of spending (the biggest customers).
Household demographics are not static, but ever changing. The aging of the population is reshaping consumer demand, bringing boom times to some businesses and bad times to others. Best Customers reveals the coming peaks and valleys, allowing marketers to prepare for what lies ahead.
The Demographic Trends
Three major demographic trends are reshaping consumer markets: the middle-aging of the baby-boom generation, the coming-of-age of the Millennial generation, and the growing sophistication of older Americans.
The baby-boom generation, born between 1946 and 1964, spanned ages 33 through 51 in 1997. Boomers number 78 million and account for 29 percent of the population. During the next few years, boomers will almost entirely fill the 35-to-54 age group. Not only are 35-to-54-year-olds in their peak earning years, but they are also raising children, making them doubly important consumers because they control the spending of not just one generation but two. The aging of the highly educated, individualistic, and fun-loving baby-boom generation is behind many of the spending trends examined in Best Customers.
Today's children belong to the Millennial generation, born from 1977 through 1994 and spanning the ages of 3 through 20 in 1997. Millennials number 71 million and account for 26 percent of the population. Most are the children of boomers. As this large age group enters its teens and twenties, it is replacing the much smaller Generation X. Consequently, demand for products and services for young people is growing after years of decline. As Millennials become twentysomethings during the next decade, they will energize many languishing consumer markets.
Perhaps no segment of the population is changing more rapidly than the 55-plus age group. The older population is becoming increasingly sophisticated as better educated and more affluent generations join its ranks. Spending by older Americans is growing, especially on discretionary items such as entertainment and travel. As boomers move into the 55-plus age group, the spending of the older population will become increasingly important to most businesses.
The Spending Data
Best Customers is based on unpublished data collected by the Bureau of Labor Statistics' Consumer Expenditure Survey, an ongoing, nationwide survey of household spending. The Consumer Expenditure Survey is a complete accounting of household expenditures, including everything from big-ticket items such as homes and cars, to small purchases like laundry detergent and film. The survey collects spending records from 25,000 U.S. households each year. It does not include expenditures by government, business, or institutions. The lag time between data collection and publication is about two years.
The Consumer Expenditure Survey uses consumer units rather than households as its sampling unit. In this book, the terms 'consumer unit' and 'household' are used interchangeably. A 'consumer unit' is defined by the Bureau of Labor Statistics as 'a single person or group of persons in a sample household related by blood, marriage, adoption or other legal arrangement or who share responsibility for at least two out of three major types of expenses-food, housing, and other expenses.' For more information about the Consumer Expenditure Survey and consumer units, see Appendix A.
Three types of household spending figures are shown in this book: average spending, indexed spending, and market share. The Bureau of Labor Statistics (BLS) produces the average spending figures shown in Best Customers. The indexes and market shares have been calculated by the authors.
How to Use This Book
Best Customers is divided into 19 chapters, arranged alphabetically, with each chapter focusing on one of the major spending categories as defined by the Bureau of Labor Statistics-such as food at home, transportation, entertainment, and so on. Computer and travel spending are separate chapters in Best Customers but are not separate categories in the Consumer Expenditure Survey. The BLS includes computer spending in housing, and it includes the travel categories in food, housing, and transportation. Within each chapter, individual products and services are arranged alphabetically.
Almost every individual product and service included in the Consumer Expenditure Survey is analyzed in Best Customers. Three types of items are excluded: 'other' categories, such as 'other food at home,' for which an analysis of spending patterns cannot provide meaningful conclusions a few products and services with spending patterns considered unreliable by the authors and spending categories that are not consumer markets-such as federal income taxes, Social Security taxes, and vehicle registration.
Each table in Best Customers analyzes household spending on a particular product or service, showing average spending, indexed spending, and market share of spending by age of householder, household income, household type, and region of residence. Each table is accompanied by a page of text identifying the best and biggest customers and predicting trends in spending based on the nation's changing demographics.
o Average Spending The average spending figures in Best Customers are unpublished data from the Bureau of Labor Statistics' 1997 Consumer Expenditure Survey. The Bureau of Labor Statistics calculates average spending for all households in a segment, not just for those who bought an item. When examining the averages, it is important to remember that by including both purchasers and nonpurchasers in the calculation of the average, the average spending amount is often greatly reduced-especially for infrequently purchased items. For example, the average household spent $232 on day care centers in 1997. Since only a small percentage of households spend money on day care, this figure greatly underestimates the amount spent on day care centers by those who make use of them. To get a more realistic idea of how much buyers spend on an item, Appendix B shows the percentage of households that purchased individual products and services during an average quarter of 1997, and the amount spent by purchasers per quarter. According to Appendix B, only 5.79 percent of households spent on day care centers during an average quarter of 1997. The purchasers spent an average of $693 per quarter, for an estimated annual cost of $2,772-a much more realistic figure than the average of $232 for all households.
For frequently purchased items-such as milk-the average spending figures give a fairly accurate account of actual spending. But for most of the products and services examined in Best Customers, the average spending figures are less revealing than the indexes and market shares.
Average spending figures are useful in determining the market potential of a product or service in a local area. By multiplying the average amount married couples spend on children's clothing by the number of married couples in the Pittsburgh metropolitan area, for example, marketers can estimate the size of the market for children's clothing in Pittsburgh. The Pittsburgh newspaper could show those figures to potential advertisers to prove the demand for children's clothing in its readership area.
Indexed Spending (Best Customers) The indexed spending figures compare the spending of each demographic segment with that of the average household. To compute the indexes, the authors divided the amount spent by each demographic segment by the amount spent by the average household and multiplied the resulting figure by 100. An index of 100 is the average for all households. An index of 125 means average spending by households in a segment is 25 percent above average (100 plus 25). An index of 75 means average spending by households in a segment is 25 percent below average (100 minus 25). Indexed spending figures identify the best customers of a product or service. Householders aged 45 to 54, for example, spend 79 percent more than the average household on outdoor furniture (with an index of 179). This is a higher index than that of any other age group, making householders aged 45 to 54 the best customers of outdoor furniture. Householders aged 25 to 34 spend 32 percent less than average on outdoor furniture (with an index of just 68), meaning they are a weaker or under-served market for this product.
Spending indexes reveal hidden markets-household segments with a high propensity to buy a particular product or service but which are overshadowed by larger household segments that account for a bigger share of the total market. For example, householders aged 55 to 64 spend 26 percent more than the average household on women's shoes (with an index of 126), making them the best customers of this item. In contrast, householders aged 35 to 44 spend only an average amount on women's shoes (with an index of 100). But the spending of the older age group is overshadowed by the spending of the more numerous 35-to-44-year-olds. The younger adults accounted for a 23 percent share of total spending on women's shoes in 1997, versus the 15 percent share accounted for by 55-to-64-year-olds. While market share is important to businesses, those that track market share alone run the risk of ignoring the customers who spend the most on their products.
o Market Share (Biggest Customers) To produce market share figures, the authors first calculated the total amount all households spend on each item. This was done by multiplying average household spending on an item by the total number of households (105,576,000). The authors then calculated total household spending by item for each demographic segment. This was done by multiplying the segment's average spending on an item by the number of households in the segment. To calculate the percentage of total spending on an item that is controlled by each demographic segment-i.e., its market share-the authors divided each segment's spending on an item by total household spending on the item.
Market shares reveal the biggest customers-the demographic segments that account for the largest share of spending on a particular product or service. In 1997, for example, married couples without children at home (most of them empty nesters) accounted for 62 percent of total household spending on ship fares. The cruise industry could reach the great majority of its customers if it targeted only this demographic segment. Of course, by single-mindedly targeting the biggest customers, businesses cannot nurture potential growth markets. An additional danger of focusing only on the biggest customers is that businesses can end up ignoring their best customers. This is especially problematic because market shares are unstable, thanks to baby booms and busts over the past half century. Right now the biggest customers of hunting and fishing equipment, for example, are householders aged 35 to 44, accounting for 29 percent of total household spending on this item. As the baby-boom generation exits the 35-to-44 age group during the next few years, however, the market share controlled by these householders will shrink, only to be surpassed by the share controlled by 55-to-64-year-olds-who are, in fact, the best customers of hunting and fishing equipment (with a spending index of 173). Marketers who ignore their best customers in favor of their biggest customers may end up with no customers.
o Age of Householder Age is one of the best predictors of spending because lifestage determines most consumer wants and needs. Ongoing changes in the age structure of the population will have a profound effect on consumer spending. This is why Best Customers explores spending by age in so much detail, using it as the primary guide to consumer trends in the years ahead. Below is a chart showing projected changes in the number of households between 1997 and 2002:
Changes in the size of age groups will dramatically affect spending in many categories. Fewer young adults will mean less spending on products and services for infants. More fiftysomethings will mean higher spending on travel. In addition, the attitudes and behavior of age groups will change as they fill with new cohorts. These demographic trends are behind many of the predictions made by the authors about spending trends in the future.
o Household Income It's no surprise that the richest households spend the most. For most of the products and services examined in Best Customers, households with the highest incomes appear to be the best and biggest customers. Yet the story behind spending is more complex than income alone. Most spending is driven by lifestage (age) or lifestyle (household type), and secondarily by income. That's why Best Customers identifies high-income households as the best and biggest customers only when income has an extraordinary effect on spending or when an item is a purely discretionary expense-such as spending on indoor plants and fresh flowers. While most businesses would do well to target the affluent, they would find it difficult to design a product or craft a message if they ignore the lifestage and lifestyle reasons for the spending.
Note: Average household spending figures by income are slightly different from those by age, household type, or region. Spending by income is calculated by the Bureau of Labor Statistics using only those householders who reveal their incomes to BLS interviewers (called complete income reporters). In contrast, average spending figures by age, household type, and region are based on all households.
o Household Type Household type is one of the most important determinants of spending for several reasons. The presence of children, for example, means the household will spend on products and services children want and need. Not only that, but households with children tend to include more people than those without children, and household size is an important determinant of spending. Because married couples head most of the nation's households, they account for the majority of spending in most categories. But single parents are important in some markets, and single-person households have growing clout because they are becoming a larger share of households. The most important household change occurring in the next five to ten years, however, will be the rapid expansion in the number of married couples without children at home as boomers become empty nesters. At the same time, the number of married couples with preschoolers will decline as Generation Xers enter the 25-to-34 age group.
Note: Market shares by household type will not sum to 100 percent because not all household types are shown.
o Region For many products and services, regional differences in spending are small. But for some items, regional spending differences are pronounced. There are several reasons for this including differences in regional economies, climates, physical infrastructure, racial and ethnic composition, and access to resources. Differences in regional population growth rates will affect household spending levels in the years ahead, and these are noted in the affected categories.
Appendices
Best Customers includes four appendices and a glossary of terms.
o Appendix A describes the Consumer Expenditure Survey in more detail and tells readers how to contact the Bureau of Labor Statistics.
o Appendix B shows the percentage of households that purchased each product or service examined in the Consumer Expenditure Survey during an average quarter of 1997. It also shows how much the purchasers spent on an item during an average quarter. In some cases, the quarterly spending figure alone is a good estimate of how much a typical purchaser spends. Take refrigerators, for example, which are a one-time rather than an ongoing expense. In an average quarter of 1997, 1.6 percent of homeowners bought a refrigerator, spending $751 on the item. For ongoing expenses, however, the quarterly spending figure should be multiplied by four to get an estimate of how much people spend annually on the product or service. Fifty-two percent of households bought women's clothes during an average quarter of 1997, for example, spending $207 during the quarter. The annual spending of householders who buy women's clothes can be reasonably estimated at $828 (or $207 times 4). Appendix B not only supplies readers with invaluable insight into the propensity of households to buy individual products and services, but also provides a more realistic idea of how much purchasers spend.
o Appendix C ranks all the products and services analyzed in Best Customers by the amount the average household spends on them, from highest to lowest. It shows which categories are most important to the household budget. The relative standing of products and services is often surprising. To know that gasoline is the 5th biggest expense of the average household puts the media's focus on gasoline prices into perspective. The fact that federal income taxes, Social Security taxes, and property taxes are the 1st, 3rd, and 6th biggest household expenses explains why so many people feel financially strapped. Some of the tax items included in the list are not analyzed in the book because they are not consumer markets. The authors have included them in the ranking, however, because they are such an important part of spending.
o Appendix D shows trends in household spending by major category between 1987 and 1997, after adjusting for inflation. Average household spending barely rose during the decade once inflation is factored in. Spending fell sharply for many discretionary items, such as alcoholic beverages, furniture, and reading material. Spending rose for many nondiscretionary categories such as health care, mortgage interest, and telephone service. While consumer spending has been growing strongly at the national level since the early 1990s, that growth is due to the expanding number of upper-income households rather than any spending spree by the average household. Now that the baby-boom generation is entering its peak-earning years, the number of affluent households is growing. The average household, however, is keeping a tight grip on its wallet.
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