• by Sarah Mahoney  @mahoney_sarah, March 11, 2010

While there are plenty of signs that the luxury market is bouncing back, the last two years have permanently altered America's relationship with the luxe life, says Pamela Danziger, founder of Unity Marketing. Baby Boomers perceive themselves as less affluent -- and less materialistic.

While Gen Y definitely has champagne tastes, they won't be able to back it up with real bucks for another decade or so. She calls the gap between the two groups the "luxury drought," and says that, for marketers of prestige and premium products and services, those simple demographics are destiny. Marketing Daily asks her to explain the shifting sands of affluence.

Q: Are these changes due to the recession?

A: No. The luxury drought was coming anyway. Yes, the recession made it happen faster and harder, but the bust would have happened no matter what, just because of the aging Boomers. The siren call of luxury gets easier to resist, and people become less materialistic. They realize that what their mother always told them was right: Stuff doesn't make you happy. As a result, Boomers are rapidly aging out of the window of affluence. That changes things for marketers -- these people are not going to buy an expensive handbag just because some ad campaign tells them it's a must-have. They are becoming very resistant to marketing.

Younger affluents (35 to 44) spend roughly 40% more on luxury goods and services than those in the 45-to-54 group, so to marketers, they are more valuable than Boomers. But that is Gen X, and there are far fewer than them. That's creating a shortfall for luxury marketers -- the luxury drought.

Q: What does make Boomers respond?

A: They are much more responsive to experiences and more willing to spend on them -- dining and travel. But those were among some of the first places they cut back, and will be one of the last places they add back. Brands and products that they feel somehow transform their lives will be seen as essential purchases -- TiVo, Apple, smartphones, for example.

Q: So how should marketers rethink their plans?

A: For one thing, it's time to question whether it makes sense to market to the rich -- those are people we define as having a household income of greater than $250,000 per year. (But it's worth noting that the average household income in this group is $415,000.) Very few people fall into that category -- about 11% of the total affluent market -- and the competition among these prestige brands is fierce. There are four times as many households in the lower range of the affluent category -- they won't be buying prestige products, but the quality and value of premium products will continue to have very strong appeal.

Q: How is affluence defined right now?

A: The top 20% of U.S. households, with combined income of about $100,000. But it's important to point out that perception is reality, and these people often don't feel like that is a lot of money. The top 5% have a combined income of about $180,000.They won't buy Hermes, but brands like Coach and Michael Kors have a great deal to offer them.

Q: What do marketers need to know to reach the affluent?

A: As a rule, they too, are newly resistant to marketing. And there is real competition for them in mass channels. They are hard-working people who lead increasingly complex and demanding lives, juggling home and child care. They're dining out less, shopping around more, and simply avoiding stores in order to keep from spending. They are really, really smart and you can't put one over on them -- and they know that by shopping around, they can live one rung higher on the affluence ladder.

Q: Why focus on their income, and not net worth?

A: For marketers, that's essential. People use income for consumer goods, and that is what drives consumer spending. Wealth gives them a sense of cushion, of confidence. We really need income, but people don't spend their net worth and they shouldn't -- those are investments meant for the future.

Q: How important is Gen Y to luxury marketers now?

A: In a sense, not very -- affluence is something comes in middle age, when earnings peak, and they are still 10 years away from that -- young affluents won't dominate the luxury market again until 2020.

Q: Can brands win them over now?

A: Yes. Lower price points, leading edge Internet strategies, social media, transformative experiences -- these all appeal to these younger affluents. We'll see lots of mass marketers finding a way to offer them premium goods: CVS' Beauty 360 stores are a good example.