Building for the K-shaped economy is something I think all founders need to start considering.
The K-shaped economy refers to a pattern we are seeing in the US and other western countries where we have some people doing very well. These are people working in tech, finance, law, and even trades earning more money than they ever have particularly for business owners. The other branch of the K we have people performing worse over time with lower wage growth and lower material conditions. The advent of AI has not helped this in some of those same high performing industries with thousands being laid off from tech companies, automation like self-checkouts removing roles for young people and less skilled staff. Computer science students, once all but guaranteed high paying jobs are now struggling to find work.
An example of the K-shaped economy at work is Apple releasing the new MacBook Neo for $599 and Airpods Max 2 for $549. This means that a pair of headphones is worth roughly the same as a 6-core laptop from the best laptop manufacturer. We have two very different consumer groups here, the first is spending $549 on peripherals that merely supplement their devices and the others are spending $599 on their entire setup for work or school.
This can only happen in a world where the top 10% of US earners account for nearly 50% of all consumer spending. In the 90s that same group accounted for roughly 30%. Concentration of wealth and spending will impact the way you price and market your product.
It is instinctive to target the higher end of the branch where you can make more money with fewer sales but I ask you to consider how your product will compete in a smaller market with more competitors. Are you capable of providing the premium experience that the top 10% of US earners are looking for?
There are opportunities on both sides of the K-shaped branches. Companies like Walmart are poised to capitalize on the lower branch of the K-shaped economy by selling volume products for cheaper prices. They do not claim to sell luxury high end items but instead appeal to people trying to stretch their dollars. They are able to generate huge revenue numbers by having strong distribution networks and a strong strategy on where they build stores.
If your product is relying on network effects, how will you position yourself on the upper branch of the K-shaped economy? That is approximately 34 million Americans you are selling to which by itself is a big number but pales in comparison to the remaining 306 million Americans outside of the top 10%. If your product assumes homeownership, access to capital, or a certain income threshold, you should consider what your realistic total addressable market is.
There is a lot of wealth being generated whether through AI companies, new classes of technologies, capital and asset appreciation, but there is a counter pressure with tech layoffs, inflation, and a hiring market that is not recovering evenly. The mistake will be building a product without fully understanding where you are placing yourself in the K-shaped economy. What will happen if the gaps continue to grow?
So, which branch are you building for, and do you think the gap keeps widening from here?
Image: Looking south from Phillip Island in Victoria, Australia