Consumers spend more freely when they believe they are in a solid financial position. But when money is tight, they become more demanding and discerning, writes Nigel Bowen.
Imagine how inclined you’d be to splash your cash around in the following two scenarios.
In Scenario One everything is rosy. The value of your home has been skyrocketing in recent years, your super balance is growing strongly, and your share portfolio is performing well. Sure, you’re probably not seeing significant annual wage increases. But given inflation is low, you’re not going backwards in terms of what you can purchase with the contents of your pay packet.
In Scenario Two the value of your property is in freefall. The price of the shares you own — either indirectly via your super fund or directly via your portfolio — is trending down. The only thing rising is inflation, which means your real wages are declining. Even if you’ve now started getting pay rises bigger than two or three percent, your wage probably isn’t keeping up with inflation. (Global inflation is running at 8.3 percent and the RBA expects Australia’s inflation rate to reach 7.75 percent by the end of 2022 whereas NZ may have peaked already this June at a rate of 7.3 percent.)
Even if you have no plans to sell your house or shares any time soon and are decades away from retiring, the ‘paper losses’ you’ve suffered in Scenario Two mean you’re likely to tighten your belt.
Economists call this the ‘wealth effect’. In plain English, it means people spend more as the value of their assets rises and less as their value declines.
The consumer sentiment shift has begun
In Australia and New Zealand, we’ve spent many years enjoying Scenario One, but throughout 2022 we’ve begun shifting more towards Scenario Two.
Rising housing, food and fuel prices, along with gathering economic storm clouds, don’t seem to have depressed Australian consumer spending as much as expected. They continued to spend up big throughout the first half of 2022.
But if the party hasn’t already ended, it seems likely to do so soon and we’re already beginning to see this play out in New Zealand consumer spending rates.
Fears global recession imminent
The Australian Treasurer recently warned that, “global challenges we confront are intensifying, not dissipating: inflation is rampant; central banks are responding with blunt and brutal rate rises; and growth is slowing.
“The economies of the United States and the United Kingdom are in reverse; China’s has slowed markedly; and the war in Ukraine sparked an energy crisis which shows no signs of abating.
“This is why the International Monetary Fund won’t rule out another global recession.”
As a result, consumer spending in NZ has already taken a hit while things in Australia may not begin to cool down until the end of the year or into 2023. But make no mistake: the state of consumer confidence will begin to have a marked impact on consumer behaviours soon if they haven’t already.
3 tactics for maintaining sales and customers in tough times
Given the situation, it’s reasonable to assume consumers will increasingly seek to patronise businesses that provide good value and, perhaps even more importantly, are perceived to be providing good value, over the next 12 months.
Here are some strategies that may help you hold on to your existing customers and gain new ones into 2023.
Investigate new revenue streams
Three decades ago, Jeff Bezos was running an online bookstore out of a garage. If Bezos confined himself to simply selling books via the internet, his business might not have survived the dotcom crash and GFC and Bezos certainly wouldn’t have become one of the world’s wealthiest people.
When their traditional revenue sources dried up during the pandemic lockdowns, the more innovative publicans and hospitality businesses focused on creating new ones. They started home delivering cocktails and meals, selling kegs of beer, offering online mixology classes, and operating as convenience stores.
It’s likely those businesses are now in a stronger financial position than their counterparts who just shuttered their venture and waited around for things to get back to normal, so take this as a sign for you to get innovating.
Review pricing strategies
Regardless of what’s going on in the wider market, it’s generally advisable to be reviewing your pricing strategy on a regular basis.
If you can afford to do so, offering deeper discounts can be a way of catching the eyes and wallets of penny-pinching customers, but when business costs are on the way up and margins are squeezed, discounting isn’t necessarily an option.
In fact, some businesses are already responding to market conditions by raising their prices – one notable example is Ikea, which has been found to have increased some product prices by up to 80 percent.
But a pricing strategy can encompass much more than simply whether you’re raising prices or lowering them.
Before the recent inflation breakout, many businesses kept prices stable for years on end, even in the face of rising costs, through shrinkflation. That is, scaling down your goods or services while maintaining the same price point.
Shrinkflation has long been popular with food manufacturers; Toblerone infamously widened the space between its triangles to reduce the amount of chocolate in every bar in 2016.
With a little imagination, many businesses can keep their prices steady by spending a little less on their products and services. Retailers might stop offering ‘free’ home delivery. Restaurants could replace expensive ingredients with cheaper ones. Gyms might save on letterbox drops by cutting back on birthday and seasonal greeting cards to their members.
Whatever you do, approach any significant change to your pricing strategy with caution. If you’re in a competitive market and you strip too much out of your offering or make otherwise drastic changes to pricing, what’s to stop your customers moving to a competitor?
Reduce costs and boost efficiency through digital transformation
You may believe your business has all the efficiency-promoting, cost-saving technology it needs. This is unlikely to be the case.
For instance, forward-thinking eateries have been saving on wait staff costs by having diners order via a supplied iPad or through their phone after scanning a QR code. But some cutting-edge establishments are going a step further by having robot waiters transport dishes from the kitchen to diners’ tables, reducing labour costs even further.
Even if robots aren’t (yet) an option for your business, chances are you could be getting more bang for your buck from both your hardware and software systems.
If it’s been a while since you examined it closely, there may now be new tools that will allow you to make your business processes more efficient. For example, considering the implementation of a business management platform to properly integrate your finances with inventory, payroll and much more.
For bigger businesses, this is even more important due to the size and complexity of the data and processes involved, which is why enterprise resource planning (ERP) systems have become more prevalent in recent years.
Rise to the challenge
All businesspeople eventually face serious challenges. The ones who prosper tend to be the ones who think creatively then take action.
If you want to survive the coming economic crunch and set your business up to thrive when conditions improve, it’s now time to start brainstorming ideas to lower costs and raise revenue.