This article originally appeared in the 2012, No.
2, issue of
The journal of high-performance business
Special Report: The new growth agenda
Finding growth off the curve
By Armen Ovanessoff, Athena Peppes, Mark Purdy and Matthew Robinson
With so many markets around the world simultaneously approaching critical mass, how do companies decide where and when to invest their scarce resources? Consumption curves—an old idea imbued with new power—can provide those answers and more, including how to shape markets to their advantage.
“Follow the money,” the saying goes. Today, from a global company’s perspective, more and more of that money is found doing business in emerging economies. Indeed, Accenture analysis of more than 40 of these markets suggests that their collective household income will jump by more than $8.5 trillion in real terms between 2010 and 2020, contributing nearly 60 percent of the entire global increase in household earnings during that period.
evolve over time. We believe that a fundamental concept in economics— the industry consumption-curve model—provides a rigorous way to make this critical evaluation. Consumption curves offer a robust approach that puts global opportunities into perspective, balancing trade-offs across time horizons and revealing where and when it makes the most sense to invest.
Consumption curves, first used more than 150 years ago, are economic models that plot the relationship between a country’s average annual income and the expected sales or penetration rates of products or services in specific consumer industries (see sidebar, page 6). Used correctly, these curves can provide a detailed understanding of today’s fast-evolving emerging markets. They enable businesses to exploit the recent explosion in data and analytics technologies, allowing them to apply tested theoretical constructs to practical applications in strategic planning. This story begins with the earliest formal expression of an income-consumption curve, developed by German statistician Ernst Engel in 1857. Engel was the first to describe in systematic terms how expenditures on a particular good or service will vary with household income. With more income, consumers can trade up from buying basic products like soap to premium offerings such as shampoos or conditioners, to put this in a contemporary context. Or, if incomes rise enough, people can begin to trade in their bicycles for motorcycles, or motorcycles for their first automobiles—trends currently taking place in many emerging markets. You can construct an Engel curve that specifically addresses your industry and target markets—with either a global or a country-by-country focus. The latter approach can help organizations understand the often unique factors that influence demand and the development of local markets, allowing executives to make more
Consumption curves put global opportunities into perspective, balancing trade-offs across time horizons and revealing where and when it makes the most sense to invest.
Little wonder that in a recent Accenture survey of nearly 600 executives at multinational companies, 80 percent said they’re primarily focused on emerging economies for their next stage of growth. For business leaders, the ripening of a number of emerging markets has further complicated an already complex situation. Consider, for example, that today more than 20 emerging economies—including Kazakhstan, Venezuela and Nigeria—have more households with annual incomes that exceed $50,000 than China, the perennial favorite among these markets. But this is only a snapshot in time, and the larger picture continues to change. With the rise of so many attractive emerging markets, and with those markets hitting various development stages within different time frames, strategic decision making is more of a challenge than in the past, when developed economies were the only real game worth pursuing, or even more recently, when you could count the number of promising emerging alternatives on the fingers of one hand. Today, choose wrong and you could wait years for a market to become active. Or, worse, you could enter it too late. To make sound strategic decisions, companies need a way to synthesize all of the information available into an accurate assessment of a market’s potential and, critically, how it will
informed decisions when forging future growth plans. For example, for non-life insurance products such as health or property/ casualty coverage, the relationship between household income and market penetration is strong. Because consumers consider these types of insurance “luxury goods,” they become attractive only at higher income levels. Lowerincome groups typically lack not only the funds to purchase policies but, in the case of p/c policies, even the possessions such insurance covers.
In fact, in our experience, successful global corporations are never content to simply follow the curve. Instead, they are able to use consumption curves in three more innovative and specific ways: to aggregate pockets of demand to uncover new markets; to operate above their consumption curves through the use of strong brands or local relationships; and, most important, to develop a deep understanding of the drivers of demand that allows them to shift the entire consumption curve for an industry.
Consumption curves enable companies to prioritize and sequence investments in order to claim their share of the market as household incomes increase.
Our research also shows that timing is critical in this industry. Conventional insurance products are not very attractive for people with low incomes, and even when people earn enough to afford these purchases, insurance is a product that can take a long time to catch on. As a result, the timing of an insurance provider’s market entry is particularly important. Entering when income levels are too low can sap profits as companies wait for demand to come. But entering too late often means they must contend with well-established competitors that have spent time and money building brands and local relationships. By developing consumption curves for multiple markets, executives can forecast when it makes the most sense to enter a given one, based on its population’s ability to purchase specific products. They can also discover which markets are likely to grow rapidly and which are reaching maturity, providing the basis for informed choices regarding market selection and timing of entry.
1. Aggregate curves to uncover new markets
Consumption-curve models can help companies find opportunities that competitors miss. By identifying interesting market groupings and “aggregating” demand across multiple market-specific consumption curves, they can find opportunities others may miss. This approach enables successful organizations to look across global markets, seeking pools of demand that by themselves might seem inconsequential but that collectively represent huge opportunities. Examples include serving the large and culturally homogeneous expatriate populations that exist worldwide, or tapping into like-minded global gaming or social networking communities. Consumption-curve modeling can help strategists locate and target these dispersed markets. Our research shows that companies with a knack for choosing ripe markets actively look beyond the obvious when deciding where and when to play worldwide. For example, the international growth strategy of consumer goods company Dabur India leverages the growing Indian diaspora. The company has aggregated an attractive customer segment, based on similarities in hair-care preferences, that spans South Asia and the Middle East. Dabur sees this strategy as a springboard
The greatest value consumption curves provide is their ability to anticipate changes in market dynamics and opportunities over time. A basic understanding of these models can enable companies to “track the curve”—prioritizing and sequencing investments in order to claim their share of the market as household incomes increase.
The consumption curve: How it works
For most goods and services, there is a relationship between household income and consumption. Non-life insurance is no exception, as shown by the clusters of lower-income and higher-income economies below. Global industry consumption curves—generated using analytics—go further and offer wider insight: in non-life insurance, consumption becomes progressively more responsive to increases in income, as illustrated by the increasing gradient of the curve. The amount spent on premiums begins to take off when households have more valuable possessions and can afford to protect them. Local factors explain the occasional outlier.
Non-life insurance consumption curve, 2008
5,000 4,500 4,000 Premiums per capita ($) 3,500 3,000 2,500 2,000 1,500 1,000 500 0 0 20,000 Turkey 40,000 60,000 80,000 100,000 120,000 Low-income economies Russia High-income economies United States Japan Netherlands
Average household income ($)
Source: Oxford Economics, Swiss Re, Accenture
for broader growth in new segments of global consumer markets. Another example: France Telecom’s Orange brand. In analyzing potential customers across its African and Middle Eastern markets, it found that regardless of nationality, one consumer segment uniformly wanted extremely low-cost, easy-to-use telephone service. So the operator launched innovative services such as Bonus Zone, which offers special prices when network traffic is low. As a result, Orange discovered an aggregated consumer segment that spans Botswana, Cameroon, Côte d’Ivoire, Egypt and Madagascar. Procter & Gamble provides a compelling example of this principle. In its quest to attract 800 million new customers by 2015, the company has targeted some
of the least affluent consumer segments worldwide. In striving to serve these “$2-a-day” customers, P&G is moving beyond its traditional concentration on higher-end beauty and personal care products. A large part of this strategy involves looking past market boundaries to reach consumer segments that exist across high-growth markets. One early success chalked up to this initiative was the launch of an affordable men’s razor that requires less water for shaving—a product the company felt would be attractive in low-income areas with limited access to running water. In just three months, P&G’s Gillette Guard became the best-selling razor in its pilot market, India, and today claims more than half of that country’s razor market. The company plans to replicate this success around
the world, developing lines of personal grooming and hair-care products that target water-scarce regions across China, India, Africa and Latin America.
market as a whole rather than just their individual share. By collaborating with policy makers to lay the foundation for future demand or by introducing disruptive innovations that can stimulate new demand, companies can shape markets to provide future opportunities. And by conducting a scenario-based sensitivity analysis using consumption curves, firms can better anticipate the impact of such business and policy changes to estimate market penetration and the total size of the opportunity. Three examples demonstrate this approach. Low-cost cars. Inspired by the introduction of Tata Motors’ low-cost ($2,500) Nano passenger car, we looked at the effect rising incomes and lower industrywide car prices could have on sales over the next decade. As a baseline, we determined that rising incomes would boost India’s ratio of cars to people from 10 per thousand to 28 per thousand from 2008 to 2020, which would translate into a market for 3 million automobiles sold annually. We then posed a question: What would happen if the industry could drive average car prices down 50 percent by 2020? Our analysis revealed that doing so would potentially increase car sales by about 25 percent, or an annual average of 750,000 units above the baseline— in effect, shifting the consumption curve outward. While on the surface this analysis may seem like little more than common sense—lower prices mean more people can buy new cars—it actually has huge strategic implications for automotive players in India and similar economies. The Nano proves low-cost cars are feasible, but significantly reducing the average car price will require companies to transform their business models from top to bottom. For manufacturers interested in pursuing this strategy, consumption curves offer concrete,
2. Outperform the curve to break away from the pack
Experience shows that some companies have cultivated the capacity to operate “off the curve.” In other words, companies that enjoy strong local relationships or a particularly strong brand in certain markets—in China, for example, Rolex is the timepiece of choice for more than 20 percent of the country’s affluent consumers—can claim a higher share of consumption than one would expect at a given income level. Through brand identity and smart market positioning, these companies have discovered new consumption possibilities that go beyond the constraints of the curve. Achieving these levels of market dominance requires considerable foresight and planning. In Latin America, for example, two major telecom players, América Móvil, owned by Mexican billionaire Carlos Slim Helú, and Spain’s Telefónica, are currently using this approach in some of the region’s smaller markets. By acquiring the necessary infrastructure, securing key relationships and introducing new services such as mobile data, broadband and pay TV, the two telcos are positioned to be at the center of Latin American markets when they begin their inevitable acceleration. As a result, followers will likely have significant difficulties competing against them.
3. Shift the curve to generate new opportunities
Most of the time, executives are looking along an Engel curve to anticipate market trends. But leaders can also act proactively to shift consumption curves—increasing the size of the
About the research
Companies have a number of decisions to make when building industry consumption curves for evaluating a market’s business potential (see story). These include which countryspecific structural factors to incorporate in the analysis and the scenarios that will be used to test how the consumption curves might change due to business or policy actions. To develop the examples discussed in this article, Accenture, in collaboration with Oxford Economics, followed three steps. 1. Define the shape of the consumption curve. We explored different ideas for the general functional form of each sector’s consumption curve, and ultimately chose the logistic functional form as the most appropriate fit, based on the academic literature and the nature of the selected industries. The logistic functional form typically produces an S-shaped curve and works well for modeling “normal” goods—goods that see increased demand as incomes rise. The S-shaped curve helps by approximating the typical market evolution of normal goods: slow initial uptake, followed by rapid penetration and, finally, a slowing of demand as market maturity sets in. For “inferior goods”—for which consumption drops once incomes pass a certain threshold as consumers switch to better alternatives—the relationship between income and consumption may be better approximated with an R-shaped function that more accurately illustrates the initial rise in demand and then the falloff as consumers switch from the inferior goods to normal goods. 2. Estimate the consumption curve. Next, we estimated the global relationship between market penetration and household income for all of the countries under review. The curve implicitly assumes that the relationship between household income and market penetration takes the same shape—or functional form— across all countries. We then incorporated relevant country-specific structural factors. For example, for passenger car market penetration, we included the percentage of paved roads in each country. For broadband penetration, we considered the average broadband speed in each market. 3. Identify the market phases. We identified the take-off, rapid-growth and maturity points for each consumption curve. The take-off point indicates where market penetration begins to increase significantly at the bottom of the consumption curve. The rapid-growth point occurs where the slope of the consumption curve is steepest, and the market maturity point is where market penetration does not rise significantly, despite increased incomes.
quantifiable evidence of the payoff they can expect from such challenging efforts. Broadband penetration. Scenariobased sensitivity analysis can also help leaders understand the impact of business and policy changes on market penetration, providing the information needed to decide when and where investments should be made. We used this approach to model the potential impact of efforts by the Chilean government to increase broadband coverage and Internet access across the country. As a baseline, we assumed that from 2008 to 2020, rising incomes would boost demand for broadband from eight to 15 out of every 100 people. Our scenario then looked at the impact of providing broadband coverage to
Chile’s entire population, including the 20 percent of low-income urban and remote rural households without access to any fixed broadband network. We found that improving access to the Internet could boost broadband uptake rates by approximately 25 percent. Instead of 15 people out of every 100 using broadband by 2020, the number would rise to nearly 19, which would translate into an additional 650,000 subscribers. By providing specifics that go far beyond gut instinct and vague experience-based generalizations, consumption-curve models like this one give leaders the tools they need to sell new programs to citizens and investors alike. By collaborating with government, busi-
For further reading
“The Age of Aggregation,” Outlook 2011, No. 3 For this article and other related content, please visit www.accenture.com.
ness associations, other firms and even competitors, companies can increase the size of the prize for everyone, boosting their own prospects for growth through win-win solutions. And by using consumption-curve insights to act first, they can capture disproportionate returns from their investments in broadband. What’s more, the benefits of shifting the curve usually far outweigh the costs associated with doing so. For instance, South Korea has developed one of the world’s leading broadband networks, driven by private-sector efforts and strong government support. Begun in 1994, the plan originally connected nearly 85 percent of households to broadband service with speeds of up to 1 megabit per second. Although expensive, South Korea’s effort to shift the broadband consumption curve outward has paid off handsomely. Today, high-speed broadband permeates the country. Combining private-sector investments of $14.5 billion with $1.76 billion in government loans, the network has created value far in excess of its cost, boosting productivity and sales for businesses nationwide, nurturing an entire generation of tech-savvy citizens, and making the country a leader in key market sectors such as telecommunications and gaming. Microinsurance. Yet another instance where players acted to shift the consumption curve outward involves the creation of the microinsurance industry in less developed markets. The disruptive innovation in this case involved offering life and other types of insurance—products typically focused on higher-income segments— to populations earning incomes of less than $8 per day. Of this group, which the World Bank estimates to include between 4 billion and 5 billion people, approximately 2.3 billion are potential consumers of microinsurance services, making the global market potentially huge. So far, an estimated 135 million—
about 5 percent—have insured themselves, and the total market could ultimately generate between $30 billion and $50 billion in annual premiums. Government regulators typically limit the amount of life insurance microinsurers can offer. In South Africa, for example, the limit is about $6,400— far below coverage levels for higherincome consumers. Premiums can be as low as 50 cents a month, and today, more than 30 international carriers offer microinsurance in different parts of the world. Microinsurance shifts the consumption curve by enabling these lower-income populations to buy insurance using a new business model and new price points.
Many companies interested in pursuing the growing opportunities emerging markets offer remain stuck in neutral. Why? Accenture research reveals that a high proportion lack confidence in their ability to identify and capture these opportunities successfully. For example, our recent survey of top executives shows that 40 percent don’t believe their organizations have the strategic and operational know-how they need to tackle these challenges. A similar number also acknowledge that they don’t fully understand the competitive dynamics they will face in these markets. Nonetheless, nearly three-quarters recognize the need to accelerate their efforts to participate in high-growth markets. Clearly, the issue for many is a perceived lack of skill, not indifference. We believe that consumption curves can give leaders the tools they need not only to identify ripening markets and determine when they should enter them but also to actually boost market potential by aggregating demand and shifting consumption outward. In fact, we believe that a commitment to exploiting the possibilities offered by consumption curves will have
significant implications throughout the executive suite, providing the approach needed to locate, shape and build new markets confidently. From strategy setting to process and IT considerations to branding and marketing, mastering consumption curves can generate new insights, make sense out of mountains of research and bring needed clarity to such complex strategic questions as, “Where do we grow next?”
About the authors
Armen Ovanessoff is the emerging-markets lead at the Accenture Institute for High Performance. He is based in London. email@example.com Athena Peppes is a senior specialist at the Accenture Institute for High Performance. She is based in London. firstname.lastname@example.org Mark Purdy is the chief economist at the Accenture Institute for High Performance. He is based in London. email@example.com London-based Matthew Robinson is the global trends director at the Accenture Institute for High Performance. firstname.lastname@example.org
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