The Luxury Consumer Market:

A Wealth of Opportunity
The Luxury Consumer Market: A Wealth of Opportunity

“These new customers for luxury are younger than clients of the old luxe used to
be, they are far more numerous, they make their money far sooner, and they are
far more flexible in financing and fickle in choice. They do not stay put. They now
have money to burn. The competition for their attention is intense, and their
consumption 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 luxury

has been “democratized” and marketed to a wide swath of the consumer
population. From clothing to cosmetics, watches to a wine, vehicles to vacation
travel, luxurious indulgences are no longer reserved solely for the likes of the
Rockefellers or Rothschilds. In a society where financial and social betterment
are widespread and attainable goals, luxury marketers are in the enviable
position of being able to sell their goods and services to an ever-expanding
market of affluent families and individuals.

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

Targeting the Right Clientele

As it does to many social and economic situations, Pareto’s Principle, or the

80/20 rule, applies very well to the luxury consumer market: 80% of sales and
profits 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 and
develop lasting relationships with that exclusive but dynamic group of people who
are 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.

2
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 luxury

consumers—expend no small effort in seeking to identify their “sweet spot” of
target consumers. This means using market research to quantify and segment
the consumer population in order to focus on the consumers whom they can
most profitably serve.

The goal of this report is to provide marketers with insights into the luxury market
by presenting the best and most authoritative research that describes and
quantifies the demographics of the luxury consumer. The focus is on the various
classifications of the luxury consumer, rather than on the specific luxury products
they 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 Robb
Report. ''It's a matter of the entire visceral and emotional experience attached to
it. 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 that
matter, are luxury consumers confined to a singular level of wealth or income.
The body of luxury market research mirrors this multifaceted approach to
understanding just who classifies as a “luxury consumer” and the corresponding
size of the opportunity.

Some researchers take an inclusive approach and consider households with

minimum annual incomes of $75,000 to be luxury consumers, while others are
more exclusive and focus only on the part of the population with $1 million or
more 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 most
respected outfits taking this approach, and use government data such as the
Bureau of Labor Statistics’ Consumer Expenditure Survey or the U.S. Census
Bureau’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.

3
Of the 112 million households in the most recent (2002) Consumer Expenditure
Survey, BLS breaks down household incomes into the following equally sized
quintiles, each with approximately 18.5 million consumer units:

Quintile Average Lower

Annual Income
Income Limit
Lowest 20% $8,316 —
Second 20% $21,162 $14,599
Third 20% $36,989 $28,344
Fourth 20% $59,177 $46,507
Highest 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 the
minimum for the top quintile—approximately $75,000. Within the top quintile, she
further 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 triple
segmentation to Unity and the BLS, but with a broader range of income for the
middle 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, their
analyses of the income data still hint at a degree of exclusivity in the luxury
consumer 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 million
households, 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 income
for 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% of
affluent heads of households live in households with total assets of at least $1
million.”

4
Income vs. Wealth

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

Although there may be a high degree of overlap between groups of target

customers selected for their level of wealth, and those selected for their level of
income, one compelling reason to target the wealthy is to cultivate deeper and
more profitable long-term relationships. Mass luxury marketers such as those in
industries like high-end consumer electronics or even automobiles are more
transaction oriented than financial industries like private banking and investment
management, where fees and compensation are usually based on a percentage
of assets under management. In these cases, the relationship, and not individual
transactions, determine profitability—the higher the level of assets under
management, the more profitable the relationship.

Sizing Up A More Exclusive Market

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

The American Affluence Research Center focuses on asset wealth—in

particular, the wealthiest 10% of U.S. households. Twice a year, AARC surveys a
sample 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 worth
averages $2.7 million for these 11 million households, and they hold 85% of the
value of all publicly traded stock and stock mutual funds in the U.S.

Looking at wealth from a global perspective, one of the more preeminent

research firms is Prince & Associates headed by author and consultant Russ
Alan Prince. Several top financial institutions rely on Prince’s research and
analysis to help them target affluent clients. Accordingly, Prince segments and
quantifies global households by their amount of assets. Here is how he breaks
down the “wealth” market worldwide:

5
 Level of Affluence Wealth Range Number of
Familial Units
Low-End Affluent $1M to $5M 16,712,000
Affluent $5M to $25M 531,610
Supra-Affluent $25M to $150M 58,990
Mega-Affluent $150M to $500M 7,640
Maxi-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 investable
assets in excess of $25 million. To get an idea of the importance of these clients
to financial institutions and investment advisors, consider a management fee of
2% 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 under
management.

Another frequently cited source for measuring the global wealth market is the
annual Merrill Lynch / Cap Gemini World Wealth Report, which provides a
detailed look at the world’s wealthy households. Merrill Lynch and Cap Gemini
define levels of wealth based exclusively on financial assets, which excludes the
value of the principal residence and collectibles. The wealthy are grouped into
two categories:

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

$1 million
• Ultra-high-net-worth individuals (UHNWI): People who have financial
assets 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 world
population of ultra-HNWIs to 70,000 people. In the United States, the number of
HNWIs grew 14% to 2.27 million people in 2003. Merrill Lynch estimates that
total HNWI wealth globally will grow by 7% annually and it is expected to pass
$40.7 trillion by 2008.

6
 Measuring the Market of Luxury Consumers

Organization Household Income Net Worth Range Wealth

Range Terminology

Monroe Mendelsohn $75,000-$99,000 — Least Affluent:

Research $100,000-$199,999 — Middle Segment
$200,000+ — Most Affluent
Unity Marketing $75,000 to $99,999 — Near Affluents
$100,000 to $149,999 — Affluents
$150,000 + — Super Affluents
American Affluence — $750,000 -
Research Center $1,499,999
— $1,500,000 -
$5,999,999
— $6,000,000 +
Merrill Lynch / Cap Gemini — $1M to $5M HNWI
— $5M to $10M HNWI
— $10M to $20M HNWI
— $20 to $30M HNW
— $30M+ UHNW
Russ Prince & Associates — $1M to $5M Low-end affluent
— $5M to $25M Affluent
— $25M to $150M Supra-affluent
— $150M to $500M Mega-affluent
— $500M + Maxi-affluent

Considering Real Estate Wealth

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

According to Harvard University’s Joint Center for Housing Study, “Million-Dollar

Homes 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 median
income for all homeowners was $51,000 per year.

A particularly exclusive demographic profile is found among families who own a

home valued at $2.5 million or more. A survey released in the fall of 2003 by The
Institute for Luxury Home Marketing and Unique Homes magazine finds that the
typical owner of this type of home “is married; under age 55; works as a top

7
corporate executive, business owner, or self employed professional; makes a
million dollars or more annually; is ‘new’ money…and owns multiple residences.”

In addition to serving as a reliable proxy for wealth, home values also represent
purchasing power in their own right. Given the widespread use of home equity
loans and flexible loan structures in the past several years, homeowners with
substantial equity can easily tap into the value of their home to access additional
funds for spending and investment.

Considerations for Luxury Marketers

The luxury market is not a singular entity, but several large and growing groups
of luxury consumers. There are multiple definitions and demographic profiles of
who they are. The most appropriate strategy and demographic focus depend on
the unique objectives of individual luxury marketers. Here are some points to
consider:

• As a company, you must define your brand and your value proposition not
only through the products and services you provide, but also by defining
the most important “affluence aspects” of your target market. Is it a
particular level of income or a particular level of assets? Which makes
more sense for your company? Effective segmentation is one of the keys
to successful luxury marketing.

• Every company has its own 80/20 rule. Identify that important 20% who
make up 80% of your sales and profits. These customers are your most
loyal and loyal customers are better customers because they are easier to
deal with and more profitable to serve. They are also the best source of
new referrals since they’ve demonstrated that they enjoy doing business
with 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 and
maintain an in-depth understanding of their clientele -- their needs and
wants, and how these evolve over time. Next, they must profile their
habits, their spending behavior, and their motivations for spending. And
lastly, take every opportunity to ask them what they want and what they
like best (and least) about your company.

8
The Luxury Institute

As you dive into understanding your luxury consumers and finding the right
methods to attract and retain them, the Luxury Institute will provide you with
access to the best available research into the luxury market. We also deliver to
our members timely, actionable reports outlining best practices in luxury
marketing.

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

###

Sources

• The American Affluence Research Center, Wealth In America: Semi-Annual

Survey 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 visit
our website at www.luxuryinstitute.com.