Why disposable income is so important to marketers
In this detailed article, we use behavioural economics to explain why disposable income is so important to marketers, and more importantly, how you can use it to inform the most valuable aspects of marketing strategy.
What is disposable income?
As the name suggests, disposable income is ‘disposable’, which means that it is refers to income that is at the disposal of a person. This therefore means money that comes to them once taxes, including council tax, have been paid. This money is then available to pay for living expenses.
What is discretionary income?
Discretionary income refers to the income leftover once all the essential living costs have been paid for. The presence of discretionary income is one of the biggest determinants of quality of life. A general rule is to allocate 50% to essential living costs, 20% to savings and 30% to non-essential purchases. For marketers, this is particularly relevant, as the vast majority of brands sell products and services that can be deemed non-essential.
What are essential living costs?
In simple terms, essential living costs can be considered as living expenses that people need to keep their lives going. This includes essential purchases in the following categories:
Rent/mortgage payments
Food and drink
Household/personal goods
Utility payments
Transportation costs
Clothing
Healthcare
What are discretionary living costs?
By contrast, discretionary living costs are those that aren’t essential, and if required, a person could easily cut out. These include:
Eating out/ takeaways
Hotels/ Gyms/ Holidays
Consumer/Tech/Gaming product and services
Subscription services (Netflix, Spotify)
Experiences (theatre/sports event)
The fine line between the two
Although living expenses are essential, the purchaser may not always select the cheapest option. And for this reason, they may vary significantly between people. For example, one person may decide to buy their essential foods from a premium supermarket, whereas another may choose to shop at a value supermarket.
Living costs also vary depending on differences in the costs of living between locations. They also depend on micro factors such as the ease with which people can access goods and services. For example, a person may only be able to conveniently access one supermarket.
Furthermore, when people can earn discretionary income, they may decide to afford more expensive essential purchases. In doing so, they can afford a higher standard of living.
The value of disposable income for marketers
Disposable income sets the scene for a person’s mindset and a platform for a marketer to better understand what is likely to appeal to them. The more disposable income that a person has, the more likely they are to be able to purchase new things. By contrast, if money is tight, they are more likely to step back from spending, and minimise spending on even essential living costs.
Marketing essential living items
If you are marketing a product or service that is an essential living expense, then the product or service is needed and not simply desired by people. This means that it has a guaranteed market and is likely to support high volume, low margin businesses.
This creates the possibility of greater returns, but it also ups the levels of competition. In addition, there may be greater price sensitivity as people scrutinise frequent purchases more intensely, which ups the demand for innovation across its production and supply.
However, many essential items sit within regulated industries, which changes market dynamics. The government regulates food and energy production. It also runs much of the transport network. In other cases, there may be a monopoly, such as in the provision of water in the UK.
Marketing non-essential living items
If you are marketing a product or service that is wanted and not needed, then the size of the market is likely to be smaller. And because people have the option to choose whether, when and how often they purchase it, promotional marketing is required. This principle shapes many industries such as confectionary, soft drinks, computer games and consumer tech.
Additionally, the ability for people to use their discretion when deciding what to purchase can mean that they can ‘save up’ to afford a one off high value purchase such as an iPhone. In doing so, the purchase is likely to generate a strong emotional connection, which the brand may develop.
Establishing a target market
Disposable income has a guiding influence on where a person lives, how they like to spend their time, what they require and what they want. Marketers can develop this insight by building a picture from numerous data sources. At a basic level, the OECD collates and compares disposable income statistics across countries. In the UK, the Office of National Statistics also gathers complex regional data.
The importance of life-stage
Disposable income is strongly linked to a person’s life-stage. This can be seen if we can simplify life into five distinct groups for illustrative purposes.
Very low: Children rely on money from their parents
Low: Students relying on money from their student loans
High: Working people without children
Medium/High: Parents who have children to look after
Low/Medium: Retired people living off their savings/pensions.
Market perception
Marketers have a natural tendency to believe that a target market thinks and acts as they would. And in doing so, they often conceive ideas because of whether they themselves would personally like them.
These insights can be incredibly valuable, so long as you are a member of the target market. However, if this not the case, you may easily make mistakes in perception. These concerns can be overcome by building a picture of the target market using data. This process forms a platform from which ideas can be generated and assumptions tested.
We hope you enjoyed the article. If you have any further questions, then don’t hesitate to get in touch.
Until next time.
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