The Consumer Revolution in the two-speed Economy

A radical new breed of consumers is ignoring discount businesses across the globe and simultaneously making fortunes for entrepreneurs. They killed Borders Books in Australia. They killed Borders Books in America. And just paid full price for 40 million iPads.

The difference between winners & losers has never been more stark.

Every day the media feeds us a diet of contradictory news. One minute we’re told consumers are radically cutting back and in the next breath, Apple is predicting 10 million iPad sales for the current quarter – all at full price, all at full margin.

Millions of consumers are radicalizing first-world economies across the globe. They’re rejecting the traditional orthodoxy of price, deal, features, and status in favour of design, provenance, quality, authenticity, ethics, and brands that stand for something. These radical consumers – 4.5 million in Australia and 60 million in the US – are big spenders in any economic cycle. Right now, 91 percent of them are in the top third of elective spenders in the economy.

So, what’s going on? Are we struggling or are we booming?

The truth is we are doing both – we’re in a two-speed economy.

I and my team of social and data scientists studied almost a million consumers on three continents over ten years and looked at 2,000 measures of what people bought, why they bought it, and how that behaviour changed over time. The results are startling.

What is clear is that there is not one consumer market or one economy. There are two fundamentally different types of consumers with extremely different reasons behind what they buy and why they buy it.

How distinctly different? They’re so different they might as well be from two different planets. Each of these imaginary planets contains people of all ages, incomes and social groups.

It turns out that demographic factors like age, occupation, education and even income are nowhere near as important as the demographers would have us believe.

Using 194 factors to identify who the radical consumers are, we discovered the forensic evidence businesses need. And in fact, during the ten years of the study, not one man or woman moved from one planet to the other, no matter how much his or her income, or age, increased.

And in this economic climate, they’re getting further and further apart.

People on the first planet are driven by the deal. While those on the other planet are driven by a search for the extraordinary – the true sense of the ‘one-and-only’ – and they are willing to pay for it.

Crucially, any business stuck in the space between the two planets will struggle more and more.

On the ‘deal’ planet we have a huge number of people – just over 50% of the consuming population. That’s 10 million Australians or 120 million Americans. This planet is pretty easy to understand as the evidence shows. People here are motivated by the typical factors we are trained to expect – discounts, price, features, and status.

We call this Planet Traditional.

As economic conditions slow on Planet Traditional spending is seen as unsafe, so Traditionals of all ages are cutting back on their spending … only venturing out when the deal is so good, they can’t turn it down.

The global financial crisis and its extended hangover caused the Traditional focus on price, features, and status to intensify immeasurably. These Traditionals aren’t just looking for a good deal, they need an extraordinary deal to make them spend. Offers, deep discounts, and sale events have increasingly become the currency on Planet Traditional. The evidence shows that this behaviour is very likely to become permanent. You do not want to have the second-best offer on Planet Traditional.

To a Traditional, the deal is everything, whether it comes from the best price, the most features, or the highest status … or increasingly, all three.

Then there is the other planet where life is a little bit more complex.

These individuals make their buying decisions on a measurably broader range of factors. We call this Planet NEO, after the ‘new economic order.’

The evidence shows the economic importance of this premium consumer group is surging, creating a fast lane in the economy.

Let’s look at the difference in the confidence on the different planets. Traditional consumer confidence is below GFC levels, while the premium consumers on Planet NEO are a good 20 points ahead – and the gap is widening.

The very confident NEOs earn more, are better educated, dominate entrepreneurial, senior management and professional roles; and are more socially progressive. They research, shop and buy in ways that are significantly different from Traditionals.

For a consumer from the Planet NEO, while price remains a factor, it is rarely the most important in the decision to buy. They need to feel an emotional connection with the product or service, and implicitly see it as a representation of their own individuality.

Everyone wants the best price. For a Traditional, it always starts and ends with price, but for a NEO, price is just the cost of falling in love.

NEOs place a premium on a whole range of things that typically wouldn’t even register for a Traditional in the economic slow lane. One of the most significant of these is DESIGN – NEOs place value not only on how things look, but how that design translates into the elegance of how the product works.

Next comes AUTHENTICITY. NEOs want the real deal – no substitutes – and whom they buy from is just as important as what they buy.

And then there’s PROVENANCE – NEOs place a high value on things that are individual or unique, with a real sense of being the one and only. They love stories, narratives.

DISCOVERY – the whispered secret is far more penetrating than mass advertising to a NEO: they want to find things for themselves rather than being assailed by aggressive marketing. They value new experiences and want them on the edge. They’re the first to try new ideas, new concepts, and new places. When NEOs discover things that align with their personal values, they spend freely.

As we heard earlier, 91 percent of NEOs are in the top third of elective spenders – they’re driving the fast lane in the two-speed economy.

Now let’s compare that to those who live on Planet Traditional, many of whom earn big salaries and have a high net worth. What percentage of Traditionals are in the Big Spender category? 91 percent like NEO consumers? 80 percent? 50 percent? 25 percent? 10 percent? No, it’s 4 percent. Only 4 percent of Traditionals qualify as Big Spenders. And yet for most businesses, doing business on Planet Traditional is all they know.

The most obvious example of this economic schism is, of course, everyone’s poster child Apple. Their cutting-edge uniquely designed products and anti-corporate style are a natural fit for NEOs. Apple sales skyrocketed all the way through the GFC and beyond.

As another example, I remember a wonderful artisan bakery near my home that was thriving with a diverse customer base. It flew in the face of traditional geo-demographic modeling. The baker told me that most of his customers, happily paying a premium for authentic sourdough and incredible croissants, were driving right across town … old, young, jeans and t-shirts, suits, hip, and buttoned-down … anyone looking for something exquisite, regardless of price, was there.

So, now we can explain it. We have something as simple as the two-planet premise … and it uses the psyche, the mindset, of consumers to reveal the truth defining the two-speed economy.

I can tell you from experience – you’re either going to get the NEO concept like a bolt from the blue, or you’re not going to get it at all. And that’s fine. If everyone thought the same, we wouldn’t have two planets, we’d have just one.

Now, for the first time, we can all see the stark difference emerging in the two-speed economy. Traditionals are building security and slowing their spending by the week. While NEOs are building wealth and increasing their spending by the hour.

NEOs account for 65% of total assets in Australia – including superannuation, retirement incomes, managed investments, banking accounts, business investments, and direct investments. They are 63% more likely than Traditionals to own shares and have an average share portfolio of $110,000 compared to $81,000.

They own almost three quarters (73%) of all equity in Australian businesses and critically when it comes to corporate behaviour, one-third of NEOs are responsible for major corporate decisions. Compare this to just 9% of Traditionals.

NEOs are the future shapers.

What may look inexplicable to the untrained eye is actually businesses going premium – using NEOs to find their way into the fast lane of the economy.

So, when you hear one day that consumers are cutting back, and the next that they are buying more local produce, personal services or more cool technology … you aren’t going mad. What you are actually hearing are the stories of two very different planets and the people who live on them. The evidence is clear. There are two fundamentally different consumer mindsets and a two-speed economy.

Whatever the size of your business, you need to be offering something extraordinary, or you need to be offering an extraordinary deal. Learning the difference is a matter of survival.

Today, the most important question to ask is, “What Planet Am I On?”

There are fortunes to be made on Planet NEO. For some companies, this means breaking up into separate brands to succeed. But for most, it is going to have to be a straight choice – do I want the fast lane or the slow lane? Making this choice is what becoming a 21st-century brand is all about.

This isn’t just academic theory. It’s data science that makes a tangible difference to businesses. And it’s critical to businesses from tiny to titan.

The key to extraordinary success is being on the right planet, in the right economic lane – your customers are already there. You should probably think about joining them.

Dr. Ross Honeywill is a social scientist and internationally published author. He advises national and global brands on premiumization strategies.