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Profiling or segmenting a target audience is one of the mainstays of marketing for small businesses, particularly for small and-medium-sized enterprises (SMEs) that fall into a niche category. Since the late 1980s, South African business owners and marketers have classified members of their target audience according to the Living Standards Measure (LSM). Since those formative years, the term has expanded to include “lower LSM” and “higher LSM”, perhaps with many us of 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 ultimately, 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.

This; fascinatingly, is where knowledge about how the system works, begins and ends for even some of the most seasoned marketers. What many do not know, is that LSM ranks people based on their ownership of standard goods; like a flush toilet, a dishwasher 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 a number of 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.

A number of 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 of the scale. 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 South African household landscape. This is set to change with the introduction of the relatively new Socio-Economic Measure (SEM).

How SEM is determined

The SEM system was developed by Neil Higgs and his team at leading market research agency, Kantar TNC. The tool measures how people live according to what infrastructure they have access to, factoring in 14 variables or inputs that are unique to the South African socio-economic climate, including whether or not 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 0-10 indicating low socio-economic living and 91-100 indicating high socio-economic living. These scores are grouped into clusters and supergroups for finer targeting.

Why SEM matters to SMEs

The way SMEs profile their target audience is set to change dramatically over the next few years, with the introduction of the SEM scale. What this means for SME owners and marketers is that targeting will be more refined and more reflective of the true South African demographic.

A recent report showed that while most South African households have access to electricity, access to running water and access to transport is a major differentiating factor. These 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 is a myriad of benefits to be derived from gaining a detailed understanding of the system and recognising that the South African demographic is nuanced and complex.

Perhaps one of the most important tasks for budding South African entrepreneurs is to find the opportunities that lie within the real demographic status of the South African population. Identifying existing 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.

ENDS

About the Author: Ben Bierman

Ben Bierman has been our Managing Director since 2015. He joined our company in 1990 and has risen through the ranks occupying various positions ranging from being a management accountant, Head of Information Technology and Chief Financial Officer. Ben is an avid reader, enjoys classical music and being in the outdoors including for hunting trips. He is our go-to-spokesperson for our SME Confidence Index, SME sector policy and trend matters, and business leadership articles.

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