Saturday, November 17, 2007

The Decline of Lifestyle in the United States

I made a comment that has been brought into question:

The percentage of people who fall into the market segment they are targeting is shrinking.

I'm a melancholy-choleric, the wrong kind of person to question the facts on, you're about to get unloaded on.

First, let's start with some common knowledge. Credit Card debt is at an all time high. Personal Savings is at an all time low. While these are not proof positive that people with money are becoming a smaller percentage of the population, it is an indicator of the financial sickness in our society.

The rest of the information, the real meat, is taken from three tables found at Historical Income Tables - Households from the US Census Bureau and Historical Income Tables - People from the US Census Bureau.

NOTE: The charts shown below start with 2006 or 2005 on the left and go further back in time towards the right. That is different than most charts and may take a little getting used to. It puts the most recent information closest to the values on the left, making it easier to evaluate the most recent data (most important in my opinion).

I couldn't quickly find the study done on inflation that stated that when the government reported inflation at 3% it was really 8%, so all the following will use the inflation number reported by the government, which paints a grim enough picture.

UPDATE: Someone pointed me to a website that had the following chart showing the differences in inflation numbers from www.shadowstats.com. The rest of this post has not been updated, so keep in mind that the rest of the inflation numbers may be about 2.5 points lower than they really are.


And with that, let's start with inflation. Below is a chart of the inflation reported by the federal government from 1968 to 2005.



What I find funny is the last six years. Anyone who has paid for medical insurance or had any medical expenses knows that their overall expenses have increased a lot more than 3% or 4% per year. Also, if you live in a "hot" housing market (like Southern California) you know that your overall expenses have gone up more than 3% or 4% per year. So let's stick with these inflation numbers and call them conservative numbers.

Now lets look at how income is distributed among our population. Here is a chart of the population divided into 5ths. There is an even number of people represented by each 5th. This chart is the income of each 5th, adjusted for inflation.



Notice how the highest 5th pulls away so quickly from the rest. I've included the top 5% also, notice it pulls away even faster. The other incomes are basically flat (relative to the explosive income growth of the top 5th). Basically this chart states that the rich get richer and the poor at least stay the same. It's that 5% that is pulling up the top 5th. It looks like if you pulled the top 5% out of the top 5th, it would be flat too.

UPDATE: I've remembered my algebra, and have updated the graph to show the Highest Fifth, without the top 5%:


This chart alone shows that there is a widening gap between the 5% and the 95%. It also shows that if you are looking for a very large market, target those whose incomes are $50,000 and under, which is 60% of the population. If you want to bump that to 80% target $75,000 and under. 60% of the people probably couldn't afford to spend $800 to $1,200 per month (300 PV in Quixtar), not to mention tools, conferences, seminars, etc.

Now you may argue that with Quixtar, you would quickly be able to become self-sustaining. If that were the case, 60% of the people would not quit after 3 years. The reason they are not in a higher fifth is their thinking. It is going to take more system to help get their thinking to the point that their business will pay for itself, especially in 6/4/2 or 9/4/2 business building. That was the beauty of Team Approach. You could start getting up to 25% back on the products pretty quickly (making the pricing more in line) and have time to get your thinking in line to produce more income. Imagine if the products were a great deal to begin with. It would be a no-brainer for anyone to be a customer, better prices and personalized service. Then you could actually have people getting to break even within a month of getting started. But I digress.

Now let's look at how fast incomes rose for each 5th. The chart below shows what the average yearly increase (after inflation) in income was per year for each 5th. The 2000's should probably be ignored, since we only have the first half of that story (which starts out pretty sad).



Notice that again, the top 5th far exceeds everyone else in growth. The top 5th, on average, got just over 2% raise every year during the 90's. However, the top 5% was pulling that up, since they were getting almost 3% raise every year. Everyone else is sitting there on the low end of 1% (actually, the three lowest got 0.93%, 0.78% and 0.85%, and the 4th Fifth got 1.13%). Now these are the increases in income after inflation, which is probably a little on the low side, so these are actually more likely to be negative growths. Of course if you look at the 2000's, its just not a pretty picture so far.

UPDATE: Again, due to my remembering algebra, I'm able to bring you this updated chart, with the 5% taken out of the Highest Fifth:


Now there are a few reasons I think many people may not have felt this as much. One of which is that we have gone from a single earner per household society to a two earner per household society. The chart below shows the average Household Income and the Income Per Capita (all income in all households divided by the number of people).



The Per Capita number is a bit misleading. Family sizes have been shrinking over the years. That means that a typical family in 1970 might have had a father (the bread winner), a wife and three children. This means his income was divided by 5. Today it may be more like a father (one bread winner), a wife (another bread winner) and two children. This is the combined income of two divided by 4, or each bread winner's income divided by 2.

Notice how the Household income still pulls away faster, even given the information above. There are more two income-earner families, which has taken the brunt of the economic force. But what will the average family do to keep up? Dad works two jobs? Multiple nuclear families living together? What will be the social trend to help bear the brunt of the increasing expense of getting by?

So back to the questioned statement:

The percentage of people who fall into the market segment they are targeting is shrinking.

If you focus on people who make $75,000 and less, you get 80% of the market. Of course, there are people in the Highest Fifth that shop at Walmart, because everyone would rather spend their money on fun stuff, and save money on the everyday stuff to do it. Even Emeralds and Diamonds shop at Walmart (as seen in a few of the Affidavits).

However, if you price yourself so that only the upper end of the 4th Fifth and the Highest Fifth could afford it, that is a 30% market share. While they have more money, I'd rather have 1% of 100 men than 100% of 1 man.

If you would like the full spreadsheet, PDF and images used for this posting, email me at ThomasEvanAnthonyMorris (at) gmail (dot) com, and I will email you everything I used (1.3 MB zip file).

17 comments:

IBOFightback - Fighting the Amway Myths said...

Actually Tom, I *love* getting hard data, so you're the right person to ask :-)

I haven't had a chance yet to read your whole post, but it appears to me from your data that the number of people earning $50,000 and above is increasing, yes?

How does that at all fit with your assertion the target market is shrinking?

Secondly, you say -

However, if you price yourself so that only the upper end of the 4th Fifth and the Highest Fifth could afford it, that is a 30% market share. While they have more money, I'd rather have 1% of 100 men than 100% of 1 man.

This focuses on revenue and ignores the issue of profitability. If you drop prices then your profit margin almost certainly decreases, so 1% of 100 men paying less is not the same as 100% of 1 man paying more.

If we assume the commonly used model which allows 30% retail markup, dropping your prices 15% is actually a 50% drop in profitability. Of course, things are confounded by the possibility of others in the supply chain contributing to the price decrease through decreasing their profitability, and potential for increased economies of scale, but the issue remains, it's not as simple as you like to make out.

Will said...

It is as simple as making up the drop in profitability with the higher volume. Is it not better to have masses of high to low income brackets buying your low priced products; rather than having only the few top brackets buying your high priced products? Learning to serve the masses rather than a few rich folks is a much Godlier way to travel through this short life anyway.

Tom Morris said...

it appears to me from your data that the number of people earning $50,000 and above is increasing, yes?

Except that the value of $50,000 is decreasing faster than their income is increasing. Inflation is eroding their income.

This focuses on revenue and ignores the issue of profitability.

It focuses on long term stability. If the economy goes down, people will start to look for less expensive options. If you are the less expensive option, more high end people will discover you.

c00lnerd said...

I am in the above $50K group ($95K). I have been in this same group for almost 10 years as my income increase per year has disappeared. With 7 children and the only bread earner, my income has dramatically decreased in real terms. We have averaged 250-300 pv over the last few years, and it has been increasingly difficult to justify. We have tried to cut back to just the essentials, vitamins, energy drinks, etc, and my wife would like to buy some makeup since she likes artistry, but it is really hard to justify the price.
With TEAM we have begun to see some growth finally (after 10 years in the business). Most of the people I know are in the same economic boat as I am, so to market, I need to go outside my friends, relatives and associates and market to the higher income levels, but who will they market to, given the current marketing strategy of Q?

IBOFightback - Fighting the Amway Myths said...

According to Tom the potential marketplace is some 30% of the population (or households?). Amway has very little of that 30%, so plenty of room to expand.

Tom Morris said...

The problem is twofold. First, you are limiting yourself to a small market. Second, it is a market that many times feels it is doing "Ok," so they may not be as hungry (ie looking).

Anonymous said...

Excellent point about the system that TEAM provides. Because of that system the income means very little to someone I would talk to. If they are trading time for money, no matter how much they are making per year doesn't apply. The right thinking is where TEAM Leadership developement is heading. Applicable to the entire demographic of the this and other countries. We need a revolution of proper thought and the proper engagement of that thought.
Lauching a Leadership Revolution.

SisterSam said...

Look guys, if ibofightback wants to sell products for the rest of his life, let him! Personally, if I wanted a sales job, I would look for something with a better compensation/commission structure than Amway/Quixtar.

The reason I was attracted to Quixtar was that I believed Independent Business Owner meant I could build a long-term, self-sustaining business. When your product target market is at the upper end of income-earners, you will not find many of them interested in building a business--they probably already have one!

What ibofightback does not seem to want to admit is that there is PLENTY of room to lower prices of the A/Q products without giving up too much profit for the owners. And of course, when you sell a premium product at a lower cost, you will always sell a larger volume. This leads to MORE profits for the owners.

I am really beginning to suspect that the top dogs in Ada are a few crumbs short of a crouton.

IBOFightback - Fighting the Amway Myths said...

Tom, you appear in your last comments to be referring to the opportunity rather than the products? That's a different kettle of fish altogether.

sistersam - don't be obnoxious. You know as well as I that the only way to earn an ongoing income is through someone somewhere "selling" something. A properly built A/Q business is not remotely like "a sales job". The problem I see with what some in Team was doing is that folk were not buying products because they wanted them or believed in them, but because of the attached business opportunity and the potential to earn bonuses. That's artificial demand and is something the FTC doesn't look kindly upon.

On the other hand I earn monthly commissions on folk who aren't building the business and whom I haven't even spoken to since I moved countries 7 years ago. Why? Because they like and wanted the products, and continue to like and want the products, and continue to buy them. Legitimate demand.

Tom Morris said...

Tom, you appear in your last comments to be referring to the opportunity rather than the products? That's a different kettle of fish altogether.

Not in Quixtar's case. Less than 4% of sales go to retail customers (people not interested in the "opportunity"). So the "opportunity" is pretty much one in the same as the people buying the products. The whole internal consumption thing.

Anonymous said...

You can find the inflation stats that you were referring to at www.shadowstats.com.
This is a widely quotated site at the Hard Assesst and Resource Investment conferences around the continent.
Hope this helps.

IBOFightback - Fighting the Amway Myths said...

Not in Quixtar's case. Less than 4% of sales go to retail customers (people not interested in the "opportunity").

Have you got any evidence to back that up? I know the 3.4% member/client volume statistic, but I know I sponsor an awful lot of folk who join as IBO primarily for the product related benefits. Less than 25% of folk who join ever sponsor anyone, and less than 13% earn a bonus on downline volume (eg stacked folk not building wouldn't count in this). Yet 50% of all folk who join order products after the initial joining and nearly a third of folk who join renew.

In other words there's an awful lot of folk who are buying products and even renewing who aren't building a business. Even the FTC acknowledged back in the 70s that a lot of people join primarily for IBO access to the products.

What makes you think that has changed and that these people are today only buying the products for the business opportunity?

Anonymous said...

http://qssr.blogspot.com/
2007/11/open-letter-to-doug-devos-
and-steve.html

rocket said...

"Even the FTC acknowledged back in the 70s that a lot of people join primarily for IBO access to the products."

Can you prove that?

The FTC asked people if they joined for access to the products?

IBOFightback - Fighting the Amway Myths said...

My mistake, I thought that was in FTC vs Amway, but I can't find it. May have been in later FTC docs.

In any case, in FTC vs Amway they do note, numerous times, that a significant portion of Amway distributor purchases are for own consumption and they also note "Only one­ fourth of all Amway distributors engage in sponsoring"

It is indeed a leap to make a claim about their motivation for joining - however if they're not sponsoring, I don't think it's much of a leap to consider their ongoing motivation for purchasing.

Tom Morris said...

In any case, in FTC vs Amway they do note, numerous times, that a significant portion of Amway distributor purchases are for own consumption and they also note "Only one fourth of all Amway distributors engage in sponsoring"

Also note that it was a very different business back then. The products were actually retail-able. You could make a lot of money very quickly off just retailing.

IBOFightback - Fighting the Amway Myths said...

Tom,
On this matter I pretty much agree, with one proviso. I believe that the products are retailable. Indeed I know it, since I do it.

However, as I've said many times, you need an education to do this, and the great majority of new IBOs simply don't have it. If they do, it can still happen fast, I know for example of the recent case of a professional personal trainer in Australia. He had had a great deal of existing knowledge in health and nutrition and generated ruby volume within a few months of registering.

He had the knowledge already, most new IBOs don't. In earlier Amway years some, but not much, knowledge was needed to promote SA8 or LOC, and armed with that knowledge they were extremely price competitive. Today they are still price competitive, but you need more knowledge and they're not as price competitive.

Retailing is IMO absolutely harder for the new IBO. I don't think dropping prices on the current major lines like Nutrilite or Artistry or eSpring will however have any effect on that. Keeping up with the competitions changing prices on edibles would help, as would dropping the prices on the homecare range, something I called for a long time ago on the corporate blogs, and something I'm pleased to see Amway has done in the UK. Here's hoping the extend it elsewhere.