It’s All About Luck

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One of the biggest problems, says Shafir, is the message the poor receive from the system: You’re poor because you’re no good. “It’s very easy for the poor to swallow this idea,” he says. “The attitude that the poor are less successful is very common and very wrong. These days the survivor is the one with luck: Once in a blue moon someone pulls through. So the system isn’t ‘survival of the fittest’ at all.”

The Psychological Poverty Trap, Haaretz, 02/23/2012, Asher Schechter interviewing Eldar Shafir

Poverty Premium: Rent to Own

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In some ways, the business harkens back to the subprime boom of the early 2000s, when lenders handed out loans to low-income borrowers with little credit history. But while people in those days were charged perhaps an interest rate of 5 to 10 percent, at rental centers the poor find themselves paying effective annual interest rates of more than 100 percent. With business models such as “rent-to-own,” in which transactions are categorized as leases, stores like Buddy’s can avoid state usury laws and other regulations.

And yet low-income Americans increasingly have few other places to turn. “Congratulations, You are Pre-Approved,” Buddy’s says on its Web site, and the message plays to America’s bottom 40 percent. This is a group that makes less money than it did 20 years ago, a group increasingly likely to string together paychecks by holding multiple part-time jobs with variable hours.

“We’ve always talked about the benefits and costs,” she said on the drive home. “Because with a family you can’t just say, ‘I want this, I’m going to get it.’ But growing up having the chair, the recliner, the love seat, the couch and everything, you just get used to the normal stuff. Sometimes it’s hard to break from the normal stuff and get to reality.”

Rental America: Why the poor pay $4,150 for a $1,500 sofa, Washington Post, Chico Harlan, 10/2014.

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Then in the fall of 2001, Motta discovered Rent-A-Center. Situated in mostly poor neighborhoods, this chain’s 2,600 stores offer big-ticket items like furniture and electronics to millions of people with no credit. Hiking up prices and charging exorbitant interest, using a scheme critics have called “pay now, pay later,” the company racks up sales in the billions and is a key player in what one market research firm calls “the poverty market.”

But the story didn’t end there. Monthly bills continued to arrive, late fees stacked up, and “incomplete” payments were rejected. Rent-A-Center employees routinely called her at home, says Motta, and even came by in person to pressure her to pay. After two years, Motta had paid Rent-A-Center almost $2,000. “I was giving and giving and it was never done,” she recalled. “I told them to take their sofa.” The company would not comment on her case.

Darnley Stewart, an attorney who is leading a New York class-action suit against the company, finds this outrageous. “Rent-A-Center explicitly targets poor, largely minority neighborhoods and has no qualms about selling a cheap television for $700 to people who can’t afford it,” she says. Stewart’s suit, which is awaiting a ruling from the state Supreme Court, alleges that Rent-A-Center engaged in deceptive and fraudulent business practices by misrepresenting the actual costs of its merchandise and coercing customers with a “high-pressure sales scheme.”

In the face of steady complaints, Rent-A-Center argues that it is offering a service to an otherwise excluded demographic, and that its mission is simply to “improve the lives of our customers.” But others, like attorney Darnley Stewart, are not even mildly persuaded: “I don’t think you are doing the poor a favor by gouging them.”

Pay Now, Pay Later, Mother Jones, Anya Schiffrin, May/June 2005

Poverty Premium: Banking in the USA

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Life is expensive for America’s poor, with financial services the primary culprit, something that also afflicts migrants sending money home (see article). Mr Martin at least has a bank account. Some 8% of American households—and nearly one in three whose income is less than $15,000 a year—do not (see chart). More than half of this group say banking is too expensive for them. Many cannot maintain the minimum balance necessary to avoid monthly fees; for others, the risk of being walloped with unexpected fees looms too large.

Low smartphone penetration in turn makes life more expensive in other ways. The unconnected do not benefit from the cheap communication, education, and even transport the app economy provides. A quarter of poor households do not use the internet at all, which makes seeking out low prices harder.

Inflation has also squeezed the poor more in recent years. The prices of items which soak up much of their budgets—such as rent, food and energy—have risen faster than other goods and services.

It’s Expensive To Be Poor, The Economist,  09/2015

Poverty Premium Research (Harvard Business Review)

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Multinationals that failed to take these realities into account saw their best-laid business plans go bust. P&G’s PUR sachets were envisioned as a low-priced competitor to bottled water; in reality, though, poor households are used to boiling their tap water or drinking it untreated. Grameen Danone’s real competition among rural populations wasn’t expensive store-bought yogurt—it was homemade yogurt that consumers produced for a fraction of the cost.

In places where poor consumers benefit from lower prices, they often incur other costs. For example, the informal economy fails to ensure safe working conditions and reasonable wages, product quality controls, or taxes for the state. The brunt of these externalities is borne by the poor, as workers, consumers, and beneficiaries of government funds. Such places may have a “poverty premium” that multinationals could help eliminate, but that premium does not take the form of higher prices.

The Problem with the “Poverty Premium,” Harvard Business Review, Ethan Kay and Woody Lewenstein, April 2013

Ethan Kay gave a Ted Talk about creating cookstoves for poverty survivors.

Poverty Premium Research (University of Michigan and UC Davis)

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“Because they have to buy small quantities, they have little inventory at home and can’t wait until a sale presents itself to purchase again, making it even harder to take advantage of sales,” says Orhun, professor for marketing. “It’s a double whammy.”

“It’s not about poor people making poor decisions; it’s about them facing liquidity constraints,” she says, “and it matters even for what we’d consider small purchases.

Frugality is Hard to Afford, news release about research completed by Professor Yesim Orhun and PhD student Mike Palazzolo; 02/24/2016

Frugality is Hard to Afford, Working Paper (Revising for invited resubmission at Journal of Marketing Research), Mar 20, 2016, Mike Palazzolo – Paper available for download

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Perhaps this sounds like a subtle discovery about minor household goods. But it supports a larger point about poverty: It’s expensive to be poor. Or, to state the same from another angle: Having more money gives people the luxury of paying less for things.

Why the poor pay more for toilet paper — and just about everything else by Emily Badger, Washington Post, 3/8/2016

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In a recent working paper, the University of Michigan’s A. Yesim Orhun and Mike Palazzolo, point to how two of American shoppers’ (and marketers’) favorite money-saving strategies, the limited-time offer and buying in bulk, come with savings that are more accessible to some consumers than others. Choosing to buy things when they’re on sale or packaged in huge quantities is something lots of shoppers may take for granted as a matter of preference, but for many, these purchases—and the savings that come with them—are out of reach.

The Privilege of Buying 36 Rolls of Toilet Paper at Once, The Atlantic, Joe Pinsker, MAY 12, 2016

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Limited access to supermarkets and discount stores, which contributes to the idea that poor people end up paying more for things or the “poverty penalty,” is one of the biggest problems facing low-income neighborhoods.

But the study suggests that low-income families can’t always afford bulk or sale items in the stores that they do have access to.

Why poor families are paying more for everyday items like toilet paper by Ahiza Garcia, CNN Money, March 25 2016.

Poverty Premium Research (University of Bristol)

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For the purposes of this report, we can understand the poverty premium to occur for one or more of three key reasons:

  • Additional costs directly resulting from having a low income, for example because this reduces the flexibility of payment methods;

  • Additional costs associated with a low income even though not directly resulting from it, for example the additional chance that someone on low-income lives in a high-crime area where insurance premiums are high; and

  • Additional costs that can be experienced by people across income groups, but are more likely to be experienced by lower-income households, such as not “shopping around” for utility tariffs, and which place a disproportionately high burden on low-income households’ resources.

The Poverty Premium – When low-income households pay more for essential goods and services by Sara Davies, Andrea Finney and Yvette Hartfree; University of Bristol, School of Geographical Sciences , November 2016

Notes from the Introduction:

The notion of the poverty premium was first conceived by American sociologist David Caplovitz in 1963. The term is used to describe how poor people pay more for essential goods and services compared to those not in poverty. In the UK the poverty premium has been highlighted as an important social policy concern by charities and organisations working with low-income families. In 2010 Save the Children illustrated the nominal cost of the poverty premium at £1,300 per year and showed how those on low-incomes paid more for fuel, telecommunications, insurance, accessing cash and accessing credit.

This study makes a significant contribution to moving forward our knowledge of the poverty premium in the UK. It takes a fresh look at understanding why the poverty premium arises and analyses new consumer data to show how the poverty premium is actually experienced.