6 Steps to Improve Demand Analysis

When working with consumer-facing global companies, we often come across national GDP per capita as a foundation in their analyses. This is worrisome because it is usually grossly wrong.

The graphics below show six adjustments we recommend. When they are made, the strategic conclusions can be dramatically different from those based on GDP per capita thinking.

1. Household spending, called household consumption expenditure or personal consumption expenditure in national accounts, is the starting point.

Household spending as a share of GDP varies widely between countries. Using GDP paints the wrong picture.

Work With Household Spending Not GDP Chart

2. In addition, household spending has to be adjusted because governments also spend on behalf of households. This is not captured in the national accounts.

As an example, the Swedish government provides almost all health and education spending in the country. This frees up spending power in comparison to, e.g., the United States. Without the adjustment, Swedes seem to have less spending power than they actually have.

Adjust For Government Spending On Behalf Of Households Chart

3. When making international comparisons, some goods are best measured against market exchange rate dollars, others against purchasing power dollars.

E.g., demand for luxury handbags is best analyzed in market dollar terms. Demand for hair cuts in PPP dollars. The Big Mac falls exactly in between (see “Global Pricing Strategies”).

Determine If Market Exchange Rate Of Purchasing Power Parity Is Best Metric Chart

4. Some goods should be measured per individual, others per household. Using the correct metric influences conclusions significantly. Often, the best metric is household-equivalents which takes into account adults versus children in households.

Applying Correct Population Units Chart

5. It is critical to conduct the analyses at the sub-national level because spending power and the resulting demand for consumer goods vary widely within countries.

Take the example of Russia. What sells in Moscow may have no market in the rural parts of the country because of the 5x difference in spending power.

Work Sub-Nationally And Adjust For Local Spending Power Chart

6. Related to this, it is meaningless to think of demand compared to the entire population of a country. Most branded consumer goods are bought by the middle class and above. Why then calculate demand as consumption per total population?

Focus the analyses on the parts of the population that can afford the good. The example below shows how Indonesia is a much smaller market than the U.S. even though total population is about the same. Making this adjustment seems self-evident, yet it is rarely done.

Use The Relevant Part Of The Population Chart

These are six adjustments we make to improve on GDP per capita based analyses. It is important for both executives and analysts at global companies to think about how they handle them.