Age-Proof Your Strategy
Ask a company to segment its customer base, and they’ll likely come up with groups we’ve all heard of—Millennials, GenXers, Boomers, and Silents. Probe a little deeper and they’ll cut the groups by gender, race and ethnicity, religious affiliation, sexual orientation, income, geography, educational attainment, and a host of other useful demographic descriptors. One more request might even turn up a psychographic segmentation that lumps groups with wide-ranging demographic profiles based on their professed views and observed behaviors.
What you will be hard-pressed to find, however, is a company that actively segments its near-retirement customer base to understand how the phase shift will affect its business.
Why is this a problem?
It’s simple math. By 2020, the United States will see the 65+ cohort grow from 49 million people today to 66 million. By 2025, another 9.5 million will join the cohort, and by 2030, the last of the Boomers will have turned 65—at which point most of their parents will be gone and nearly the entire 74 million 65+ demographic slice will consist of Baby Boomers. When they retire from full-time work, how they do it, and whatthey do afterwards should be of interest to every business person in America.
It is irrefutable that this pending change in work status for such a large demographic will hit companies in vastly different ways.
Perhaps the most telling example of this trend can be found in the health insurance arena. When Americans turn 65, they become eligible for Medicare—opening up an expensive and confounding retail bazaar for what has been, for the most part, a wholesale market intermediated by employers. Suddenly, the 65-year-old is beset upon by agents and carriers demanding a decision about traditional indemnity plans, Medicare Advantage, Medicare Supplement Insurance, “Dual-Eligible” options, and Part-D drug coverage.
Given the distortion introduced by Medicare, health care is a special case. So, consider the financial services industry—particularly the pension and life insurance sectors, whose fundamental proposition is to smooth out intergenerational financial needs. The enormity of the Boomer generation, the relative scarcity of GenXY members, and the youthfulness of Millennials will create serious cash flow challenges for these businesses in the next decade. As corporations seek to limit their future pension exposure, many have offered retirees lump-sum buyouts of their defined-benefit plans—a tempting, albeit often murky choice for cash-strapped Boomers.
If their life circumstances no longer demand a large term life policy, for instance, Boomers might be better off looking to any number of clever financial services firms that offer “life settlements”—a discounted cash payment on the face value of a term life policy. The financial firm picks up future premium payments in exchange for the eventual death benefit. The Life Insurance Settlement Association estimates that $180B of term life insurance (i.e., face value) will be eligible for settlement between 2014 and 2023, and that transaction volume is running about $3 billion per year today.
Consider as well the airline industry, perennially chasing the business traveler. Advances in video telepresence and general comfort with digital relationships may render physical presence less important, signaling trouble on the horizon for carriers. Can vacations and tourism fill the void? About half of Millennials, despite working hard in the building phases of their careers, find time to take four or more leisure trips each year. For pre-retirement Boomers, approximately 75% take four or more leisure trips per year. However, that rate jumps to 86% for their retired peers. More importantly, the average cash outlay per leisure trip soars from $990 for actively working Boomers to $1,440 for retirees. For an airline, understanding when this particular switch gets flipped for its loyal fliers could be the difference between growth and retrenchment.
Fortunately, this is a tractable problem. The diagnostic requires an understanding of your pre-retirement customer base and a sense for how their behavior changes post-retirement. The next two steps are a risk assessment to determine the potential downside as active workers transition, and an opportunity assessment to estimate how the recently-retired might be coaxed into a new and deeper relationship with the company.
Simply put, growth is fundamental to your strategy. My colleagues at The Boston Consulting Group publish an annual review of top value creators. The 5-year median Total Shareholder Return for the 1,928 companies that made the 2015 list was a resounding 14.6%—driven in large part by sales growth, tallied at an 8.4% median rate across this set.
Unlocking the purchasing power of the Sonic Boomers is one way to put more spring in your company’s step.
Next: Old is the New New
Crisis and Opportunity in Health Care – Sonic Boomers in Old Age
Rags, Riches, and All Points in Between – Financial Secrets of the Boomer Cohort
The Pension Shell Game – A 10K Exposé
Thank you for the many comments and likes on prior installments. I greatly appreciate the feedback. Please don’t hesitate to bring up other topics that you would like to explore in future postings. You can reach me on LinkedIn.
For additional reading on BCG’s annual list of Value Creators, please go to https://www.bcgperspectives.com/content/articles/value-creation-strategy-creating-value-despite-economic-headwinds/