Have you ever wondered why sales of small-size vehicles such as eco-friendly cars, or condominiums priced at less than Bt3 million, have surged over the past several years despite little change in the income of most Thais? The short answer is that these products cater to the previously unmet needs of lower-income customers. In Thailand, the problem is one of "wageless growth". While GDP grew nearly 50 per cent in real terms (ie, excluding inflation) between 2001 and 2010, real wages stayed flat. The lacklustre growth of real wages and income means that a strategy of waiting for people's incomes to "catch up" to an existing product segment may result in similarly lacklustre demand for the product.
Waiting for people to earn incomes high enough to make existing products and services affordable at current prices is a poor strategy, as relatively few earners have managed to cross over into higher income thresholds. The result has been lacklustre sales growth.
Let's take the auto business as an example. An average mid-sized car costs about Bt800,000. At typical financing terms, such a purchase would require an average household income of at least Bt25,000 per month. But the proportion of Thai households earning more than Bt25,000 baht per month has only increased from 4 per cent in 1994 to 9 per cent in 2009. That represents an increase of only about 1 million new households during a period of 15 years. To boost sales of mid-sized cars, producers have had to get existing high-income households to buy more cars, buy them more frequently, or pay more for them, which, frankly speaking, is an uphill task.
An alternative and better way to cope with this challenging issue is to create products and services that cater to the needs of those with lower incomes. Let's stick with the auto business as our example. Manufacturers could boost profits if they were to offer a smaller-sized car at a lower price, such as a Bt400,000 "eco car" that can be purchased by households with monthly incomes of Bt12,000 baht or higher. The proportion of households with incomes above Bt12,000 is 28 per cent, compared to the 9 per cent with incomes above Bt25,000. That represents a huge increase in the number of households who are potential new customers. Hence, it is not surprising that "eco-cars" and other small vehicles have seen much more rapid growth compared to other segments. In addition, other businesses such as budget airlines, buffet restaurant chains, and apartments priced at less than Bt3 million have demonstrated rapid sales growth by offering affordable products for those in lower income groups.
Albert Einstein once scoffed at the human tendency for "doing the same thing over and over again and expecting different results". Likewise, if companies continue to adopt a traditional approach in running their businesses by counting on their existing market base and targeting existing customers, it will be difficult if not impossible for them to see sales grow as rapidly as they hope. To achieve their goals, they should consider expanding their market by offering new products and services at lower prices to meet the needs of lower income consumers.
Metinee Jongsaliswang is head of research at Siam Commercial Bank.