By Pat McClelland

On Wednesday, 4 February, AMASA held its first monthly meeting of 2009 at the JSE in Sandton. A magnificent turn-out left many sitting on the stairs - no doubt due to the significance of the topic at hand, coupled with speaker, Gordon Muller’s reputation in the industry. Muller is an independent Media Consultant, and a member of the AMF (Advertising Media Forum) Executive Committee. He gave a lucid and entertaining presentation on the new 14 LSM (Living Standards Measure) model, included in the AMPS 2008.

Muller started his talk by reiterating that he does not advocate the use of LSMs; nor does he advocate the use of the term ‘Black Diamond’. However, since the LSM model is so widely used and often insisted upon by clients, he applauds SAARF for making it more usable and more sensitive to the current South African market.

Muller began giving a brief history of the LSMs in South Africa, pointing out that pre-1994, there was simply no perceived need for a market segmentation tool – the forced geographic separation of communities along racial lines meant that markets and media consumption habits were already seen as neatly segregated. He referred to CineMARK as being an essentially white ‘medium’ in those days - merely because only white people could attend the cinema. He also noted examples such as TV BOP and Radio Bop, aimed at the black demographic.

“At that time, we were unique in the world as marketers – we knew every single reason why we were different, and nothing about why we were the same”, commented Muller. Of course, the fundamental premise of target marketing lies in the similarities between people, rather than their differences.

The 8 LSM and 10 LSM models

The LSM measure was first used in 1989, developed using a list of 71 variables, which were later reduced to a short list of 13 household variables. The market was segregated into eight LSMs – a number Muller says was completely random: “It could have been seven or nine; there was no logic to the eight”. In 1995, the list was expanded to 20 variables to include personal factors such as financial services and household shopping items. In 1997, it became apparent that a more finely-tuned model was needed to respond to the increasingly complex market, and the 10 LSM model was created – by splitting LSM7 into LSM7 Low/ LSM7 High; and LSM 8 into LSM8 Low/ LSM8 High. In 2001, four years later, it was decided to simplify the jargon and merely refer to LSM 1 to 10, rather than bothering with ‘highs’ and ‘lows’.

While these modifications were taking place, the market was also changing, and South Africa saw a transition to an emerging middle class, which grew from 24% to 40% of the population. Consequently, consumption habits changed accordingly, and there was a stronger need to understand the workings of the new market segments. As a population in transition, SAARF’s efforts to ensure that the LSM model remains relevant and in touch with the market are admirable.

The 14 LSM model

Substantial changes have occurred in the marketplace since 1997, and as such, Muller notes that the 10 LSM model had become: “increasingly disconnected from the reality of developments in the South African marketplace”.The new 14 LSM model was devised in the same way as the 10 LSM model, allowing for a tighter split of clusters by splitting the upper LSMs – 7; 8; 9; and 10- into high/low segments. And this time, instead of dealing with clumsy jargon for four years, SAARF has simply renamed the segments LSM1to14. The high/low divisions will, however, assist those that have grown accustomed to the 10 LSM model in better understanding the segments, while they acclimatise to the new model.

LSM 7 low = 7
LSM 7 high = 8
LSM 8 low = 9
LSM 8 high = 10
LSM 9 low =11
LSM 9 high = 12
LSM 10 low = 13
LSM 10 high =14

What are these segments worth?

So, what is considered ‘average’ or ‘middle class’ now? Muller explains that LSM 1 to 5 is below average; LSM6 and LSM7 low is middle class; and LSM7 high and above is upper middle class.

The new model outlines the segmentation of income clusters as follows:

• Traditional: LSM1;2; and 3 = 21%.
• Transitional: LSM4 and 5 = 30%.
• Middle Class: LSM6 and 7Low (LSM6 - 7) = 22.7%
• Upper Middle Class: LSM 7 High – 10 Low (LSM8 -13) – 22.7%
• Elite: LSM10 High (LSM14) = 3%.

From this, we can see that the power ratio of the traditional market is way below average; and that the upper middle class has the strongest relative value and power ratio.

Muller urged the audience to remember the limitations of the LSM tool, pointing out that it is a completely artificial construct.

Where are the Black Diamonds?

Muller explained that he personally believes that the term Black Diamonds is completely unnecessary, but that its widespread use in the industry warrants a mention. He notes that in the elite top 3% of the population (LSM 10 high or LSM 14); elite black households have a stronger earning potential, on average, than elite white households. But, looking at the black upper middle class compared to the white upper middle class, there is no significant difference in earning power between black and white households. And it’s in this category- the black upper middle class- that the black diamonds are found.

Muller ended off by adding that ideally, he would like to see further segmentation of the elite market – LSM 14. This is because the LSM14 bracket encompasses all households that earn a combined income of R25 000 a month. Tighter segmentation of this market would provide some very interesting and valuable insight into the consumption habits of the wealthiest segment of the population.