Economic Stress and Inflation Are Changing Consumer Behaviors
Consumers are cutting back on discretionary spending almost as much as on the essentials, but they are willing to pay more for small indulgences and treats.
Marketers and advertisers who understand their customers’ shopping motivations, and tap into empathetic messaging tied to products and services that offer comfort and well-being will be better prepared for the coming months.
What factors are driving consumers’ decisions to cut back on spending or to indulge?
Why empathetic and authentic messaging in tough times will help you stand out with your audiences?
How a nuanced understanding of customer psychology will help you build loyalty and retain customers?
Get this answers and you’re sure of cracking the tough times ahead!
With spending down, concerns about unemployment, economic volatility, and financial wealth loss promoted household savings.
What to do now: Increased household savings present an opportunity for the financial industry to devise and promote instruments to help save and hedge against risk. However, companies must be aware that inflation may dramatically impact how much people in the US are actually saving. The rising prices of goods and services may force Americans to dip into their savings instead of adding to them.
Shopping Behaviors Shifted Due to Rising Stressors
During the Great Recession, widespread unemployment, declining housing values, and general uncertainty caused many changes in shopping behavior, and some of these changes were a surprise.
■ The retreat from services was most pronounced.
Consumption declined in durable and nondurable goods across the board during this Great Recession, but the drop in service consumption stood out the most. Consumption of goods has been in decline since consumers emerged from the Covid pandemic, yet they’re eager to spend on experiences.
■ Interestingly, consumers turned to “small comforts” under economic stress. Research has shown
that expenditures on small luxuries increase during economic downturns. For example, researchers found that during the Great Recession, instead of cutting luxury spending altogether, many women turned to purchasing cosmetics as a “small comfort,” even as the relative price of cosmetics rose.
What to do now: What consumers consider a small luxury in 2022 may be different going forward, but the behavior of substitution will repeat in the coming years and beyond. Consumers will likely turn to small luxuries rather than buying big-ticket items or spending on services.
Companies and brands sensitive to consumer spending will be able to best serve those seeking small comforts during tumultuous times.
How People Spent Their Time Changed with Employment Status
The job losses during the past years were staggering, and now, with the cloud of recession on the horizon, most businesses are planning for hiring freezes and upto 80% for layoffs to counter a possible economic downturn.
Research on the Recession revealed interesting findings:
■ People spent considerable time on leisure while unemployed. When unemployed, home production (cooking, cleaning, laundry, etc.) combined with childcare absorbed about 40% of the forgone work hours. Leisure took up about 55%—sleeping, social media and TV-watching accounting for most of it. Time spent on shopping, childcare, education, and health increased, while job searching only absorbed 2% to 6% of the forgone work time.
■ The change in time allocation is stable across genders but differs noticeably between married and singles. While married people reallocated more time to home production and childcare, singles used most of the new-found time to sleep, gain social media acquaintances and gain education.
Recession Is Not Predictable, but Companies Can Prepare for It
Consumer behaviors have started shifting under
the weight of inflation. Some bear early signs of recessionary behaviors, while others may still fluctuate with economic conditions. Business leaders need to react to current spending trends for short-term results but should also plan to get ahead of the curves.
While you might argue about how different this recession hit everyone technically, consumer sentiment is clear: They are concerned about the risk and will react accordingly. Companies need to prepare for a future downturn before it gets here.
Nuanced understanding of customer psychology, value, and long-term position are the strategy.
■ Leverage substitutions within a brand portfolio across various products and pricing ranges for different demographics. People are willing to pay more for products they view as indulgences. Boat trips, Natural Juice, fizzy drinks, nutritional bars, and premade meals can become treats if the price of bread rises. And remember, different demographic groups all have their own definition of small luxuries. Careful distinction of essentials and affordable luxuries among different consumer groups can introduce more nuanced pricing strategies in different markets, neighborhoods, and social groups.
■ Cultivate and retain a customer base with better values. Consumers are more receptive to higher prices accompanied by better experiences, especially among less affluent consumers. Long-term relationships matter more for older customers. Building loyalty and investing in better customer experience will help companies retain customers and endure tough times to come.
■ Optimize short-term reactions without losing sight of long-term recovery and growth. The service industry may still be adding capacity to catch up, but it must be more prudent with cost to sustain a potentially steep and long demand drop in a recession. Conversely, big-ticket purchases are down now, but companies should continue preserving market share and capacity, as goods consumption can make quicker recovery near the end of recession. Furthermore, as unemployment impact is uneven across demographic groups, companies committing to preserving social equality with workforce reductions will be rewarded by consumers in the long run.
Investing in innovative and empathetic marketing is the key to reaching distressed consumers.
■ Think outside of the box to market with a purpose.
Marketers can help consumers find “treats” and incentives to spend on alternatives. For example, First Insight found significantly more people would reduce spending on snack and spirits than on non-alcoholic drinks and more on movies than virtual events. With smart marketing, new non-alcoholic drinks can become healthier treats than spirits, and movie watching can be turned into trendy and exciting virtual events.
■ Practice the combination of science and art in marketing when consumers are hurting. Inflation and recession hurt real people. Consumers need respect
as people as much as they are needed by businesses as opportunities and profits. Brands need to be empathetic and authentic in marketing during stressful times to be on the right side of the consumer sentiment.
Power your next move with clear and credible insights.