Introducing the Connected Spender – Income
This report was developed and published by the Demand Institute, a non-profit think tank jointly operated by The Conference Board and Nielsen.
The research that led us to the concept of the Connected Spender replaces conventional income-based approaches to consumer prioritization with a new way of classifying consumers. The Connected Spender approach does a better job of identifying who the best customers are, where they live, and where their numbers are growing. In this chapter, we show how the population of Connected Spenders differs from the population of middle-class consumers, even though many Connected Spenders also can be classified as middle class. We identify other characteristics beyond income that set Connected Spender populations apart in ways that make this group more valuable to consumer-facing businesses than a purely income-based approach.
For a complete description of the analysis presented in this chapter and country-level detail, see the Research Methodology.
COMPARISON OF THE CONNECTED SPENDER AND MIDDLE-CLASS POPULATIONS
Connected Spenders represent the global population of internet users, across all income groups, who have the wherewithal for discretionary spending and also are avid consumers. In some ways, the population of Connected Spenders resembles the middle class, both globally and in different types of economies. But in terms of its growth and spending habits, the Connected Spender cohort offers greater potential to companies.
Population size. Viewed globally, the population of Connected Spenders is similar in size to the global middle class. As of 2011, the middle-class population was 782 million (using global categories of middle-income households) and there were 808 million Connected Spenders, as shown in Exhibit 1.1 But the sizes of the two groups vary widely by region. For example, Connected Spenders outnumbered the middle class in North America by 35 million people, while there were 76 million more members of the middle class than Connected Spenders in Latin America.
In general, Connected Spenders outnumber the middle class in mature economies, and the middle class outnumbers Connected Spenders in emerging economies. In mature economies in 2011, there were nearly 102 million more Connected Spenders than members of the middle class. In less affluent emerging-market countries, the middle-class population exceed Connected Spenders by more than 100 million.
Consumer engagement. While the differences between the population sizes of Connected Spenders and the middle class are potentially significant for companies, there are other reasons to believe that the Connected Spender approach provides a more useful view of consumer populations than income-based perspectives can. The Connected Spender approach identifies highly engaged consumers—those who are most likely to purchase—within all income groups (see Exhibit 2). As a result, this concept lets companies compare market sizes across countries at vastly different levels of development. Thus, understanding the path of Connected Spenders is ultimately far more relevant for consumer-facing industries determining how much to invest in different markets and consumer categories.
Economic development. One reason why middle classes are larger than Connected Spender cohorts in emerging economies has to do with the fact that Connected Spender populations develop in two stages:
- Stage 1: Gaining access. During the first stage, where most emerging economies find themselves, consumers are still gaining access to the internet. The price of service puts internet access out of reach of many consumers. Consumers may rise into the global middle class before there is sufficient internet infrastructure for large-scale internet adoption and rapid growth in the number of Connected Spenders.
- Stage 2: Access achieved. In the second stage, most consumers have access to the internet. Therefore, growth of the Connected Spender population is driven mostly by growth in household income, levels of consumer confidence, and consumer engagement. Most mature economies are in this stage. In these economies, the number of Connected Spenders typically exceeds the middle-class population, because Connected Spenders are drawn from more income groups, including high-income groups (as defined by international standards). Indeed, in mature economies, middle classes are shrinking because so much of the population qualifies as upper middle income or high income by global standards.
These dynamics are depicted in Exhibit 3. As economies initially develop, the middle class begins to increase more quickly than the Connected Spender cohort expands. But as incomes continue to rise, the share of Connected Spenders can be expected to continue growing while the middle class, as a share of the total population, will stagnate or even shrink.
WHERE CONNECTED SPENDERS OUTNUMBER THE MIDDLE CLASS
As of 2011, China, India, the U.S. and Brazil are the countries with the largest differences between the number of Connected Spenders and the population of the middle class (see Exhibit 4). To find growth opportunities, companies will want to distinguish countries where the middle class dominates from those where Connected Spenders outnumber the middle class.
Relatively large middle classes. The economies with the most middle-class consumers relative to Connected Spenders include Brazil, Mexico, Russia and several Middle Eastern countries. These economies are still in the first stage of Connected Spender growth. Even though economic growth in these economies brought many households into the global middle class over the past decade, most of these economies still lack a fully developed internet infrastructure. Brazil and Mexico, for example, have strong middle classes, at 28% and 26% of the population, respectively (compared with 13% in 2011 across emerging economies). But internet penetration in 2011 was only 46% in Brazil and 37% in Mexico, barely above the global average. Russia’s middle class was even larger at 37% of the population, but only 49% of the population had internet access.
Likewise, internet penetration in the Middle Eastern countries listed in Exhibit 4 was low by global standards, while their middle classes were relatively large. We expect growth in internet penetration in these countries to be particularly strong over the next decade. Penetration is projected to reach 79% in Brazil, 78% in Mexico, 88% in Russia and 78% in Iran by 2025. Over that period, the size of the Connected Spenders group will begin catching up to the size of the middle class.
Relatively large Connected Spender populations. The two countries where the population of Connected Spenders most exceeds the middle class are two major growth economies—China and India. In India, there were 33 million more Connected Spenders than members of the middle class in 2011. However, that large difference is more the result of the size of India’s population and less about structural differences between the two groups. In per capita terms, the gap is relatively small—5% are Connected Spenders, and 3% are middle class. In China, however, the difference is significant. Almost one-fourth (an estimated 24%) of the population were Connected Spenders in 2011, exceeding the 18% share that qualified as middle class.
China’s large gap between the Connected Spender cohort and the middle class, compared with India’s, reflects how much further China has come in developing a modern, digital infrastructure. China jumped ahead of not only India, but also other countries at similar levels of development (based on GDP per capita). Internet penetration in China as of 2011 was 38%, compared with only 10% in India, putting China squarely in the middle of the first stage of Connected Spender growth. By 2015, China’s internet penetration had grown to 53%, while India’s remained much lower, at only 21%.
In mature economies, the first stage of Connected Spender growth—gaining internet access—was nearly complete by 2011. As a result, in most mature economies, the Connected Spender cohort is already larger than the middle class. This is true in France, Germany, the United Kingdom and the United States, for example. These countries are solidly in the second stage of Connected Spender growth, with well-developed internet infrastructures and incomes that put many consumers in the global upper-middle-income and high-income groups. This is why the size of their middle classes, relative to to total population, is stagnating or falling.
These examples underscore how much variation there can be from market to market. It is essential for businesses to track these trends in detail across all markets. The Connected Spender approach simplifies that process.
GLOBALLY, CONNECTED SPENDERS ARE WHERE THE GROWTH IS
Viewed from a global perspective, the population of Connected Spenders grew significantly faster than the middle classes from 2001 to 2011. This pattern was shaped by trends in mature and growth economies (see Exhibit 5). In the early 2000s, many of these countries had reached a point of development where internet access began to expand quickly. China stands out as a notable example: As internet access there grew from 3% to 38% between 2001 and 2011, 307 million consumers became Connected Spenders.
As noted, a major reason that growth in the populations of Connected Spenders and the middle class do not move in lockstep is that middle classes, as a share of the population, begin to shrink as incomes begin to exceed the upper bounds of middle income, as defined globally. At the same time, the Connected Spender cohort continues growing even after full internet penetration, as incomes rise. This is why mature markets gained 107 million Connected Spenders between 2001 and 2011 but lost middle-class consumers.
Indeed, the relationship between growth of Connected Spenders and growth of consumers that are either middle class or upper class is tighter, as illustrated in Exhibit 6. The chart shows how the Connected Spender cohort and the number of consumers falling into middle- or upper-income levels evolve as economies develop. Both groups continue to grow as per-capita GDP rises. In this sense, for comparing markets at different levels of development, the Connected Spender concept outperforms the middle-class concept.
AT EVERY INCOME LEVEL, CONNECTED SPENDERS OUTCONSUME THEIR PEERS
To fully understand what is driving the rise of the Connected Spender and why reaching this type of consumer will be critical to consumer-facing companies, it is important to look at how these people behave differently than other consumers.
Spending habits. At every income level, Connected Spenders diverge from other consumers both in their tendency to spend and how they spend:
- Connected Spenders are more likely than other consumers to spend money across all product categories .
- They spend a particularly large share of income on discretionary products. In fact, they consistently engage in discretionary spending above and beyond what would be expected, given their levels of income (see Exhibit 7).
- Even the lowest-income Connected Spenders punch above their weight—spending more frequently on discretionary items and allocating a greater share of income to discretionary products than the highest-income consumers who are not Connected Spenders (see Exhibit 7).
Moreover, these differences hold across mature, growth, and emerging markets.
Savings. The eagerness of Connected Spenders to engage in the consumer economy is also displayed in their savings behavior. After controlling for their higher levels of income and other determinants of the household savings rate, Connected Spenders tend to save a smaller share of their income than other internet users. In other words, they spend a larger share of their (higher) income than other households.
HIDING IN PLAIN SIGHT
In a sense, the avid consumers we call Connected Spenders are hiding in plain sight. They are members of the middle-, low-, and upper-income groups, but they are invisible to income-based market prioritization techniques. For example, a typical income-based method used for products or services aimed at middle-class consumers will miss lower-income Connected Spenders, who are equally or perhaps more likely to buy such offerings than the average middle-class consumer. Likewise, approaches that attempt to activate high-income consumers will include wealthy people who are not as engaged as middle-income Connected Spenders and may be very poor prospects.
Income certainly will continue to make a difference in the types of goods and services that consumers choose. But in a wired global economy, income by itself is not a sufficient indicator of likely purchase. As the number of consumers who can afford some discretionary spending rises, and as options for goods and services multiply—and become visible from a smartphone—consumer engagement and disposition to buy will matter more and more.
The Connected Spender concept allows businesses to measure and understand the most engaged and relevant consumer groups and use that knowledge to craft highly productive marketing efforts. To learn more about the significance of Connected Spenders as a consumer group, read The Rise of the Connected Spender. To learn more about the demographics and buying habits of Connected Spenders, read Who Connected Spenders Are and What They Value. To explore some marketing implications of the Connected Spender approach, read Implications for Consumer-Facing Businesses. For details on our methods, see the Research Methodology.