Laurel Cutler is perhaps Madison Avenue's most powerful woman. She counts among her current clients the food processors at Campbell Soup, the brand managers of Colgate-Palmolive and Procter & Gamble, and the tobacco and cereal merchants of RJR Nabisco -- as well as the top brass at Chrysler and Citicorp. What they all want is a glimpse into the future: Cutler's prediction of where the consumer marketplace is headed and what that means for their once and future businesses.

"This whole business of calling the future is either a lot easier than most people think it is, or we've been very lucky," says Cutler as she surveys the consumer landscape from the vice-chairman's office of FCB/Leber Katz Partners, 42 stories above Manhattan. While others in her trade retain a slavish devotion to market research, Cutler and her staff travel through more distant precincts in search of evidence of change in the sciences and art, in fashion and in retailing, in technology and in demographics. The patterns that emerge from these anecdotal impressions become working hypotheses that are shopped around in draft form to Cutler's clients, who collaborate in refining the good ones and rejecting the bad on the basis of their own experiences. It is only years later that there will be any hard evidence with which to confirm the hypotheses that emerge from that process. "There is," she tells skeptics, "no data on the future."

Cutler began her career as a Washington Post reporter and unpublished novelist before switching to writing advertising copy for J. Walter Thompson Co. during advertising's salad days. Now 60 and very much the industry veteran, she is a self-described "tough cookie" who delights in confronting and challenging her buttoned-down corporate clients. She spoke about consumers and the changing consumer marketplace with INC.'s Paul B. Brown and Steven Pearlstein.

INC.: There has been a lot written about the disappearance of the mass market and the rise of ever more specialized market segments. Chicken-or-egg question: is this happening more because consumers have changed or because business has changed?

CUTLER: Actually, the consumer has less to do with it than the increased competition in the marketplace. New competitors offering highly differentiated products -- these are the people who have changed the rules. Today, if you try to appeal to everybody by being bland and in-offensive, somebody is going to come in and begin to pick off significant chunks of your market. What that means is that as a marketer, you have to figure out exactly who your audience is: what are their aspirations, and what differentiates them -- and your product -- from the mass market.

You have to stand for something, and you have to stand for it very, very firmly, because if you don't, somebody else is going to come along and take it away from you.

INC.: What's a classic example of a market that's been segmented?

CUTLER: Shampoo. Back 20 years ago, the market leader in shampoo was probably protecting a market share of 45% or 50%, and all shampoos were pretty much priced the same. Today, the market leader -- Head & Shoulders -- has a share of less than 10%, and there are all sorts of tiers and segments. You even have a market now in $30 shampoos, if you can believe that.

INC.: So it's come full circle -- the market leader now is the product that started out to fill what was considered an uninteresting niche -- dandruff control.

CUTLER: But the more important point is that the market leader has only a small percentage of the market. You see, up until even four or five years ago, companies such as General Foods would think only in terms of $200-million sectors -- if the business couldn't get to $200 million in two years, they weren't interested in pursuing it. And by definition, that almost always meant mass market -- bland, undifferentiated. Nowadays, if they can identify a $50-million opportunity, they're thrilled.

INC.: Is it big business or small business that is driving this segmentation?

CUTLER: The more common pattern is that the ideas are developed by smaller companies that get to the point where they need more money, and they are bought by the larger companies. General Foods, for instance, has never created much of anything -- they have simply bought up the Posts and the Jell-Os. There are some large companies that have never lost the ability to think entre-preneurially -- IBM, Hewlett-Packard, 3M, Frito-Lay. But these are more the exceptions than the rule.

INC.: What is it about their management that distinguishes those companies from the pack?

CUTLER: Several things. They give their people the right to be wrong. They have compensation systems that pay people at least as well for creating new business as they do for maintaining old business. And -- this may be the most important of all -- they are willing to pay for the breakthrough. New ideas can't pay out in the first year.

INC.: Can you give an example from your own experience of a big company that did it right?

CUTLER: Well, let's talk about Prego, which has become a $200-million business and a very great success for Campbell Soup. What Prego had going for it was that it was a fabulous sauce in a jar -- that's not just my opinion, that was the opinion of two out of three consumers in taste tests who preferred it to Ragu, the industry leader. Two other agencies had been given the assignment of coming up with a concept to sell this sauce, but neither could come up with a scoreboard above 25. Campbell's action standard is 80. So they turned it over to us somewhat in desperation, and it turned into a wonderful collaboration.

INC.: And how did you size up the situation?

CUTLER: Ragu was sitting out there very successful and very vulnerable. It had 64% of a market that was unsegmented, offering a product that was pureed, untextured, orange, and bland -- to a marketplace that was becoming increasingly sophisticated about its food. So here comes Campbell with its sauce. It was textured, not pureed. It was very spicy, not bland, with little flecks of herbs and spices in it that you could see and taste. It was ruby red, not orange.

INC.: So you have a gloppy red sauce with little specks that any five-year-old would think were little insects floating around in it. How do you sell such a product?

CUTLER: It turns out that there is only one promise in spaghetti sauce that generates any interest among consumers, and that is that it is closest to homemade. We tried 50 different supports to that promise, and there were two winners when we tested them. The first was, "Closest to homemade because it's naturally thick with tomatoes, not starch." The other was, "Closest to homemade because it has spices and herbs that you can see, smell, and taste." In both instances, what was seen as a product deficit -- the lumpy tomatoes, the yucky spices -- was turned into an advantage. And it worked.

INC.: How did Ragu respond to the strategy initially?

CUTLER: They really didn't react much at all. You have to understand that Ragu had just faced down Hunt-Wesson's Prima Salsa by coming out with their own "extra-thick and zesty" sauce -- they spent a fortune and very quickly got Hunt-Wesson to withdraw its sauce from the market. So a year goes by, and now comes Campbell with Prego, and the folks at Ragu say to themselves, "They'll never stick with it, they'll never spend the money, so why should we spend ours?" But they were wrong. Campbell did stick with it -- they kept the spending up -- and they now control 26% of the market. And most of it is coming right out of Ragu.

INC.: Is there any one thing you consider your major contribution to that effort?

CUTLER: There are probably 39 things, all of them small in their way, and all of them important. Probably the most important was convincing them to change the name from Campbell's Very Own Spaghetti Sauce, which was very much a 1970s concept, to Prego, which was much more '80s.

INC.: Talk some more about that, if you would -- the changing character of American consumers that makes them more receptive to all this differentiated marketing.

CUTLER: There are a number of themes we've developed over the years that have anticipated changes in the consumer market -- forecasts that have held up very well. The first, which we did back in 1972, talked about "emerging lifestyles" before that term became debased. The second, in 1978, we had the presumption to call "1982." And the third, in 1985, talked about the "Europeanization" of the American marketplace. The notion was that if California had been the spawning ground for much of what was new in America in the '70s, then Europe would be the source for the '80s -- a period in which the United States finally reached the age of limits. Europe had to deal with questions of limits long ago, and so we thought perhaps we could learn from the European example.

INC.: What in particular could we learn from Europe?

CUTLER: Three things. First, that the marketplace would become much more polarized, with all the growth at the top and bottom of the market, with deep erosion in the middle. Second, that American business would move from being marketers and manufacturers to being global trading companies, making products where they could make things the cheapest, and selling where they could make the most money. And finally -- and this was perhaps our wildest prediction -- was that there would no longer be any discrete markets called upscale, middle, and downscale, but that the very same people would buy at Neiman-Marcus in the morning and K mart in the afternoon, depending on whether they cared about the category or not.

INC.: So the consumer would become much more strategic as a shopper.

CUTLER: Exactly. Indeed, for a whole variety of reasons, this is the best time that I can recall to be a consumer. There have never been so many choices, not only of what to buy, but where to buy it and how to shop for it and how to pay for it. You don't have to be a big corporation or a government any longer to have good access and good information: the information is often as close as the nearest personal computer, and the access is only a telephone call and credit-card number away.

INC.: Are there some demographic trends that are also redefining the consumer marketplace?

CUTLER: There are the obvious things -- people are better educated, more affluent, and because of travel and television, more sophisticated.

They are also, on average, more mature. By that I mean that after a rather prolonged adolescence, the big babyboom generation is entering middle age, and its outlook is changing very quickly. The adolescent says, "I am 16 years old, and I belong to a club called teenagehood, and I want to look like every other teenager -- maybe a little hipper, maybe a little quicker to spot a new fashion, but for God's sake, not different."

Maturity is quite the opposite: "I don't want to be like everyone else. I want to be independently and distinctively who I am. And I am certainly not part of any mass market. I am a unique human being, and I express uniqueness by the things I buy." That means cars, clothing, cigarettes -- those are the public things that have always been very ego-intensive consumer choices. What's fascinating now is that so many private categories are becoming more ego intensive as well.

INC.: Like shampoo.

CUTLER: Shampoo, toothpaste, even toothbrushes -- that's the newest one. Stanley Katz, our chairman, and Les Wexner [founder of The Limited] get together, and they compare notes on their $15 imported French toothbrushes. The other day Stanley walked in and announced that somebody was sending him a $100 toothbrush.

INC.: Somehow, if I owned a $100 toothbrush, I don't think I'd run around telling anyone about it.

CUTLER: I don't think you can buy a $100 toothbrush and not tell anybody about it. And that's just the point. That's how the toothbrush got out of the medicine cabinet.

INC.: Yet if everyone is so interested in defining their individuality through their consumer purchases, then why do you suppose everybody is wearing Reeboks?

CUTLER: Well, I'm not sure they are. You have to be careful to distinguish between large markets, such as Reeboks or Grey Poupon mustard, and mass markets, which are undifferentiated and appeal to everybody: Keds and French's mustard. But I don't mean to dismiss your question, because it is a good one. Markets, especially in trendy fashion categories such as running shoes, are difficult to maintain. It's like a club, and when the club gets too big, watch out -- or you'll find yourself like Izod's alligator.

INC.: And what do you do if you're Reebok, and your market gets so large that it looks like a big, fat target waiting for somebody to come along and differentiate a little more?

CUTLER: You anticipate it and splinter it yourself -- you introduce a super-Reebok, or a stripped-down Reebok.

INC.: Which one?

CUTLER: Maybe both. Although I'll say that it is always easier to start at the top and then broaden than it is to come up from the bottom.

INC.: Why is that so?

CUTLER: Call it the law of marketing gravity.

INC.: And who is the Sir Isaac Newton of that idea?

CUTLER: Maybe me.

INC.: Can you give us an example of how this law works?

CUTLER: The perfume business: the advertising is done for the $200-a-bottle pure essence, the business is done in the toilet water. Occasionally somebody has come along who has been been able to defy the law -- right now, for example, Honda is trying to move up the ladder with its Acura, as is Toyota, but they are both finding it extremely tough going. Mercedes-Benz, on the other hand, found it very easy to move down with the 190. Another example is in a category I've been working in recently -- frozen foods. Swanson has come out with a fancier line that they call Le Menu, and I think that they may have lost Swansons in the process.

INC.: What happened?

CUTLER: What happened is that General Host came into the market with a lower-priced line called The Budget Gourmet, and it's beating the pants off everyone in the top and middle of the frozen-food market.

INC.: What's their secret?

CUTLER: My hunch -- and it's only that at this point -- is that consumers decided that, in the end, frozen food is frozen food, and none of it is really very good, so they might as well go with Budget, which offered the same upscale varieties at a lower price. First they came after Stouffer's and Le Menu and hurt them very badly. And now The Budget Gourmet has come out with a line called Slim Selects, and it has taken Lean Cuisine's share down -- 24% at one point -- and I would have thought Lean Cuisine was impregnable.

It's been a great drama, and it's another indication of what I said before: we are dealing with the smartest consumer we've ever dealt with. She'll pay the difference if she can see it, taste it, smell it, feel it, or show it off somehow. But if she can't, she won't.

INC.: Campbell Soup, which owns Swanson, is a big, experienced consumer packaged-goods company. Why didn't market research tell it that?

CUTLER: Perhaps it did. But you have to remember that most market research is a crock of . . .

INC.: What kind isn't?

CUTLER: Example: you have an idea to import this lovely green bottle of bubbly water from the hills of Umbria, in Italy. So what do you do? You take your water and a carton of paper cups to a shopping mall -- the right shopping mall -- and say to people, "Would you mind tasting this water? Do you like it? Do you think your husband would like it? Would you buy it? Would you pay $2 a bottle? How about $1.50?" That kind of market research is indispensable. What is useless is hiring some survey company out of Chicago to call people at random on the telephone and ask them, "What would you like to drink?" or "Do you want some Italian bubbly water?" That kind of market research will always tell you why you can't do something. It is a substitute for decision making, for vision, for guts. In all the years I've sat listening to them, consumers have never come up with newproduct ideas.

INC.: You seemed to be saying two things just then about market research -- do it right, but also do it yourself.

CUTLER: In this marketplace, you're crazy to interpose anything between you and the consumers. If you want to know what they think, you go, you ask the questions, you watch the faces, you watch the body language, you decide whether the people are just being polite and want to say yes because they are in a rush to finish their errands.

This is the undelegatable part of giving birth to any new product. Remember, we're not talking about mass products and mass markets anymore. You're looking for 10%, and you're looking for intensity. It's not good enough any longer that 80% think it's nice. Nice is nowhere. You need 10% who love it.

INC.: What qualities distinguish the clients who can operate effectively in this consumer environment?

CUTLER: Maybe the best way for me to answer that is to give you my two parameters for taking on a piece of business. Number one, I want to work with the top people, because only they have the courage and the confidence and the risk-seeking profile that you need. Number two, I look for a deep sense of urgency, which is the name of the game. There are some companies that will take 18 years to get something to market, that will use research to give them report cards rather than insights. Use research? By all means, use it to check things out, revalidate assumptions.

But for heaven's sake, move, get out there and test. And always fix -- fix the little things.

INC.: Is it best, from your standpoint, that the person you're working with come to the project with a marketing background?

CUTLER: Actually, I think the ones who come up from R&D make for the best partnerships. They're more creative. And often they're more articulate. Scientists can be the most extraordinary users of words and builders of dreams -- many of them are poets, really. They're inventive, but they're rigorous, which is the way I like to think we operate.

INC.: And what about marketers? They would seem to be your natural allies.

CUTLER: The marketer is too often caught up in research, which is oriented more to the past than the future. Creative people have much more confidence in their imaginative leaps, in their intuition.

INC.: What about salespeople?

CUTLER: Salespeople can be fabulous to work with, but they're usually not as rigorous. The process is usually a see-saw -- you dream, then you check, dream, check. And salespeople tend to be somewhat insufficient, as a class, on the checking.

INC.: And the worst people?

CUTLER: Literal, linear thinkers. CFOs, lawyers.

INC.: You are known for your predictions about the future. Could you tell us about the general theme or themes of your next report?

CUTLER: Without going into too much detail, I think we're coming into the age of trade-offs. We were talking before about the difference between the teenager and the adult. Well, one thing that is different about adults is that they defer gratification. They plan, they work in longer time frames, they are more cautious, more scared. They think of the downside.

INC.: Most people seem to agree that the big downside just waiting to happen is a recession of some severity and duration. How will that reshape the consumer market?

CUTLER: Again, I can't answer a question about the whole consumer market, because it matters whether you're taking about the haves or the have-nots, the top or the bottom.

INC.: Well, let's start with the haves.

CUTLER: Let's face it: the haves have been on an orgy in this country over the past decade, and that means that most people already have everything they want now. They're probably going to manage perfectly comfortably during a recession just by retrenching a bit. Their compromise will be on quantity -- how long you'll keep the car or how many vacations you'll take. It will be a very European response: I'll buy one nice blouse, and I'll wear it for years.

INC.: And the have-nots?

CUTLER: In its way, the low end loves quality, too, and these people will probably be forced to part with it very reluctantly. One of the really extraordinary things is the power of premium brands in the disadvantaged black marketplace. Hennessy cognac. Bristol Cream. Pepperidge Farm cookies -- these have tremendous power. Affordable luxuries at some level are how people get through depressions. Everything else gets eliminated or deferred: restaurants, flowers, vacations . . . desserts.

INC.: And if you're running a consumer business -- as a manufacturer, as a distributor, as a retailer -- what is the age of trade-offs going to mean in the broadest terms?

CUTLER: This will surprise you, coming from a futurist, but the best guidepost to the future is the past. Particularly now, when we are hurtling into the future at such a frantic pace. We must help our customers find something to hang onto -- to sink roots into. One hundred percent quality, real service, unique design, style -- these are the product values that deliver the human values that never change: love, pride, joy, the family, self-esteem.