23 September 2020
11 min read
The world is changing at an unprecedented rate as demographic shifts, technology advancements, and cultural changes are leading to a swift rewriting of age-old business principles.
Conventional wisdom suggests businesses can develop competitive moats that create sustainable economic value over time through high brand awareness, wide distribution, low-cost production, and high fixed costs to entry. However, recent waves of disintermediation, mass brand irrelevance, bankruptcies, and increasingly inefficient marketing spend have led us to the realization that in the future, the only sustainable competitive advantage across consumer categories will come from building a company’s product, service, and brand around the consumer.
These insights underscore our team’s thesis around the Future Consumer.
Future Consumer Thesis
The consumers of the future are more diverse, empowered, and expressive than ever before. Because of this, the mass production, distribution, and marketing model of the past is ineffective at earning their loyalty. In order to build authentic connections with these Future Consumers, companies must align their product, service, and brand entirely around the consumer in order to deliver consumer-centric experiences that unlock their lifetime value and build trust.
Our approach: The tipping point in consumer demographics and behavior is both a significant risk and an enormous opportunity for technology, brands, and business models. Throughout this work, we explored four critical questions and framed the opportunity for disruptive brands, as well as the risk to incumbent leaders who fail to adapt in response to these changes:
1. Who is the Future Consumer?
2. Why are mass brands at risk?
3. How can mass brands earn loyalty from Future Consumers?
4. How does loyalty create financial value?
Who is the Future Consumer?
The Future Consumer is more diverse, empowered, and expressive than ever before.
The Diverse Consumer: The United States is becoming a “majority minority” country, a reality that simply cannot be ignored. Companies serving U.S. consumers must realize that by 2040, people of color will make up more than half of the population here. We also see women and the elderly as playing pivotal roles in the reshaping of consumer demand. While women have always accounted for approximately half of the population, they historically had been given less of a voice and had little influence until more recent years but work is still being done to reach equity. Similarly, the elderly are an often overlooked segment of the population, despite the fact aging baby boomers will play a critical role as consumers over the coming decades.
The Empowered Consumer: The balance of power has tipped in favor of the consumer and away from the brands. In the past, the consumer was at the mercy of the brands who controlled pricing and distribution in order to limit competition, which effectively created an oligopoly of powerful brands across most consumer sectors. Today, however, the Future Consumer is more powerful than ever as the Internet has democratized information and distribution while providing greater price transparency.
The Expressive Consumer: Culture and commerce are being pulled together by a consumer whose identity is shaped by purpose, creativity, and self-expression.
In an increasingly dynamic world, the traditional pillars of culture that were passed down from generation to generation are becoming less foundational to everyday life. As a result, culture and commerce have converged and consumers shop for brands with values they want to express as a part of their own identity, essentially an apex of loyalty that was aptly called “Identity Loyalty” by Professor Americus Reed.
Why are mass brands at risk?
Mass brands are at risk because their business models have not evolved to keep up with the needs of Future Consumers.
The mass model was once a “better mousetrap.” Mass brands rose to prominence over the last 100 years through business models focused on efficiently delivering goods and services to the median U.S consumer. This was done through the combination of mass production, mass distribution, and mass marketing.
Collectively, these elements of the mass model benefited consumers because economies of scale made goods cheaper than ever, distribution through intermediaries made them more accessible than at any point in history, and mass marketing through print, radio, and television created awareness to drive repeat purchases during a time when information asymmetry increased the “risk” of starting a new brand.
Mass companies are vulnerable. Despite their historical dominance, mass brands are losing share across industries and geographies. Interestingly, many of their historical strengths are now resonant weaknesses.
Demographics have shifted such that a white, young, and male audience is no longer representative of the population as a whole. As a result, demand has started to shift in tandem with the population of Future Consumers. This has resulted in a proliferation of niche groups to reflect the full spectrum of race, ethnicity, generations and genders present in the country.
Mass brands that once relied on the benefits of scale must now come to terms with decreasing volumes, which will drive fixed-cost deleverage and lower profitability. Further, e-commerce marketplaces, streaming services, and tools like Shopify have democratized distribution such that intermediaries such as physical retailers and cable companies are no longer necessary in the value chain.
Lastly, the relationship between high ad spending and market dominance is starting to break down as consumers seek to connect with brands at a more personal and authentic level. The simultaneous disintegration of these former competitive advantages have exposed the fragility of the mass model.
Emerging brands are on the rise. Emerging brands are winning by focusing on specific verticals, delivering personalized solutions, and connecting with consumers in more authentic ways. This is happening on a global scale and across industries, which is disrupting traditional mass brands that have dominated their respective categories for decades.
One example of an emerging brand is Dollar Shave Club, a men’s shaving brand that competed against P&G’s Gillette, whose $6 billion in sales and large ad budget made it the category leader for decades. By going direct-to-consumer with a customized shaving kit and focusing on a niche consumer, Dollar Shave Club was able to compete against an industry giant with limited resources; gaining 9 percent share over seven years while Procter & Gamble’s Gillete lost 20 percent market share in the same period.
How can mass brands earn loyalty from Future Consumers?
Mass models must shift to be consumer-centric across product, service, and brand, with a longer-term focus on increasing customer loyalty.
The meaning of loyalty is evolving. In the past, loyalty was synonymous with a repeat purchase. In other words, if consumers repeatedly purchased the same product or service, they were considered to be loyal, irrespective of how closely they identified with a brand.
Today earning loyalty involves investing to create long-term relationships with consumers that are intimate, authentic, and values-based. If brands are able to deliver unique solutions to demographic groups that previously had been overlooked by the mass market, they would be able to connect with consumers at an identity level and elicit the ultimate form of loyalty.
Emerging brands focus on the consumer. Emerging brands have gained share and inspired loyalty because they typically focus on a market niche and deliver the best possible experience for the consumer.
One example of this is smart fitness company Peloton, which was founded in 2012 and has carved out a niche by providing a premium smart fitness solution. Peloton’s initial focus was on smart cycling with a $2,000 bike, but has expanded into other fitness categories through the launch of personalized workouts with live and on-demand classes.
By delivering a high-quality omnichannel customer experience from end-to-end and helping consumers be the best version of themselves through fitness, Peloton has built a deeply loyal community with 92 percent retention rates, a stark improvement from the ~60 percent retention rates of traditional gyms.
Consumer centricity is critical. To earn loyalty, mass brands must apply learnings from emerging brands that have developed new business models built entirely around the consumer. They can be do this by realigning the core elements of their business models to put the consumer first:
Product: Instead of serving the mass market with one-size-fits-all products, provide solutions for niche markets and personalize interactions through software in order to deliver one-size-fits-one solutions.
Service: Instead of relying on intermediaries such as department stores or cable companies for distribution, winning brands care about creating interactions that are direct to the consumer across both digital and physical touch points. This allows them to own all interactions and deliver the customer experience Future Consumers want and expect.
Brand: Instead of being dependent on a logo or ad campaign, mass brands can earn loyalty by aligning their values with those of Future Consumers and managing their relationships through data to better understand and serve consumers.
How does loyalty create financial value?
As Future Consumers have evolved, loyalty has evolved from repeat purchases to a deeper connection of identity that could last a lifetime, making metrics such as lifetime value (LTV) and customer acquisition cost (CAC) some of the most important measurements of success for companies today.
Loyalty drives financial value through two metrics, LTV and CAC. LTV is the total value a consumer provides over the lifetime of their interaction with a brand. This is driven by spend, margins, and retention. Meanwhile, CAC is the cost of acquiring customers and is driven by the amount spent on sales and marketing to initially win over a consumer. The goal is always to drive LTV as high as possible and keep CAC as low as possible to maximize the LTV/CAC ratio.
Lifetime value > quarterly revenue growth. Many mass brands are publicly traded and as a result they have a fiduciary responsibility to shareholders to maximize value. Unfortunately, this typically means focusing on quarter-to-quarter metrics and traditional success metrics such as sales and profits. However, many companies in industries being disrupted are doing this at their own peril. Instead, they should be focusing on creating deep connections with individual consumers and maximizing the value of their lifetimes.
Amazon is a great example of a company built entirely with the consumer in mind. This required consumer-centricity to be its North Star as Amazon sacrificed profitability to invest hundreds of billions of dollars in delivering one of the best customer experiences on the planet, with the conviction that these investments would create a flywheel that would maximize LTV over the long term.
This was a view Jeff Bezos famously reiterated in a 1999 interview that “there is never any misalignment between customer interest and shareholder interest (...) It doesn't matter to me if we're a pure internet play - what matters to me is that we provide the best customer experience."
This mentality of obsession over the consumer led to results that speak for themselves: Amazon has grown its revenue ~175X since that moment in 1999 (to $280 billion in 2020) and has built a loyal following with more than 150 million Amazon Prime subscribers.
Loyalty > big marketing budgets. One of the benefits of loyalty is that it completely reshapes the customer acquisition and retention equation. While ad spend is generally high and promotions common in a mass marketing approach, the benefit of investing to build loyalty is that loyal consumers don’t need to be constantly marketed to. Rather, they consistently stick to the brands they see as creative outlets through which to express their identity.
Loyal consumers are the most profitable because they are least sensitive to price and actively promote and defend the brands they love. Historically, it has been very difficult to distinguish between truly loyal consumers and opportunistic purchasers, but tech-enabled brands can now leverage data analytics to make the distinction.
As brands enter an arms race to earn Future Consumers’ loyalty, we expect brands will increasingly give their loyal consumers extra attention and perks, while simultaneously abandoning their unprofitable customers with negative lifetime values.
Mass brand transformation is possible. Mass brands like Nike, Disney, and Starbucks that have invested heavily to apply consumer-centricity at scale show the transformative power of realigning a company’s product, service, and brand entirely around the consumer.
These companies, along with others that have transformed, provide a blueprint for other mass brands to follow in order to avoid obsolescence and cement consumer centricity as their primary competitive advantage over the next decade.
- Future consumers are more diverse, more empowered by technology, and more expressive of their identity than ever before
- Mass brands are at risk because their business models have not evolved to keep up with the needs of Future Consumers
- Mass models must shift to be consumer-centric across product, service, and brand with a focus on loyalty
- As Future Consumers have evolved, loyalty has evolved from repeat purchases to a deeper connection of identity that could last a lifetime, making metrics such as LTV and CAC some of the most important measurements of success for companies today
These are the key takeaways that have formed the Future Consumer thesis and address the key questions my team and I sought out to answer throughout our work that began at the beginning of 2020. However, we like to think of this work as never ‘finished’... and prefer to constantly keep it evolving and us iterating it over time as we learn more from other thought leaders out there: founders, innovators, operators.
Please reach out to share your thoughts, questions, or suggestions of ways in which we might be able to work together.