PROFILING or segmenting a target audience is one of the mainstays of marketing for small businesses.
Since the late 1980s, business owners and marketers have classified members of their target audience according to the Living Standards Measure.
Since those formative years, the term has expanded to include “lower LSM” and “higher LSM”, perhaps with many of us not really understanding how to distinguish between them.
How LSM is defined
LSM, as a market research tool, is a determinant of socioeconomic class, based on standard of living and disposable income. It segments individuals into 10 groups, with LSM 1, including people who have the least disposable income and LSM 10 being the people with the greatest financial means.
What many do not know, is that LSM ranks people based on their ownership of standard goods; like a flush toilet or a television set, and services like running water or home security.
Typically, LSM is a checkbox exercise and is fairly easy to calculate based on straightforward variables.
The pitfalls of LSM
As economic analysts argue, what people own, is not always an accurate reflection of their standard of living, particularly given the fact that most South Africans have a large amount of debt and live beyond their means.
Other inaccuracies became more evident as the years progressed. For example, LSM classified rural living as being part of the lower LSM bracket, with urban living on the upper end. There are obvious shortcomings here, particularly because with advancements in technology, the gap between rural and urban lifestyles is narrowing.
The prevailing opinion is that LSM misrepresents and oversimplifies the household landscape. This is set to change with the introduction of the Socio-Economic Measure (SEM).
How SEM is determined
The SEM system measures how people live according to what infrastructure they have access to.
It factors in 14 variables or inputs unique to the South African socioeconomic climate, including whether there is a police station near the home, what type of flooring or roofing a dwelling has and what type of toilet a home has as well as its location.
Individuals are scored between 0 and 100, with 0 to 10 indicating low socio-economic living and 91 to 100 high socioeconomic living.
Why SEM matters to SMEs
The way SMEs profile their target audience is set to change, with the introduction of the SEM scale. Targeting will be more refined and more reflective of the South African demographic.
A recent report showed that while most households have access to electricity, access to running water and transport is a differentiating factor.
The measurements could affect, for example, start-ups in the technology space whose target audience lies within areas with less mobility. Whether a home is a temporary structure or shack, versus a free-standing, permanent structure will have implications for new eco-construction companies.
There are benefits in gaining a detailed understanding of the system and recognising that the South African demographic is complex. Perhaps one of the most important tasks for budding entrepreneurs is to find the opportunities that lie within the real demographic status of the population.
Identifying needs, developing innovative solutions and using the SEM method to talk to the right people, at the right time, in the right way can set an SME on the path to success.
Ben Bierman is a managing director at Business Partners Limited (www.businesspartners.co.za).
*The views expressed here are not necessarily those of IOL or of title sites.
BUSINESS REPORT ONLINE