We have all felt the impact of inflationary pressures these past few months, and it is one of the main topics of conversation amongst consumers. This impact feels even bigger as we edge closer and closer to recession. This brings to light the role digital must play in bringing certainty to consumers, when so much pressure has been put on our incomes due to inflation, tax rises and soaring energy costs. In a report by Retail Economics and Hyperjar, these pressures will wipe out £12bn of discretionary spending from across the UK in 2022. The view is that this is only going to get worse.
The global backdrop
Covid – yes, that name again – has been the major cause for the situation we now find ourselves in. When the global economy turned off, including supply chains, it meant people weren’t spending as much as they normally would. When everything opened up again, it led to a pent-up demand trying to be met. Consumers were spending more than companies were able to supply. Until the pandemic is a thing of the past, we are going to see continued reverberations on the supply chain, which will increase uncertainty amongst businesses and consumers. Apple recently warned the first three months of 2022 could affect its sales by up to $8bn due to supply chain disruption.
The supply chain is working flat out. In 2021, despite ships trying to do a U-turn, the Suez Canal saw its revenue rise by 12.8% to $6.3bn – the highest ever recorded. The Panama Canal also saw a record number of transits in 2021.
As a result of all the disruptions, organisations have had to reduce outgoing costs, and where they are able, they should be opportunistic on the pricing, thus sharing the pain with their customers. But now, businesses are taking longer term actions. It cannot all be about short-term cost savings, but where they can, they should create effective economies of scale and production across every phase of an economic cycle. They are exploring their supply chains to take away the current strains and looking at areas like near-shoring production.
This need for change, in a lot of cases, stems from when businesses globalised their supply chains and focused on low-cost options. Sadly, this has blown up on us in a spectacular fashion over the last 12 months.
We are also seeing customers facing financial pressures that have not been seen since the global crash in 2008. People are tightening their belts, dropping subscriptions like Netflix, along with reducing online purchases – Amazon reported a 3% drop in online sales in April 2022. Much of this could be driven by consumers reverting to the way they traditionally shopped before Covid, but could also be linked to people prioritising their needs because of the impact of the cost of living.
Opportunities are abundant
Believe it or not, this environment offers opportunities for businesses. Over the years, we have seen that when economies get volatile, things get interesting and potentially valuable for companies. Research by Boston Consulting Group revealed that companies who respond tentatively in a downturn often result in an expensive recovery when the economy picks up.
When you look at brands over multiple economic cycles, ones that spread themselves too thin on too many products or services across too many regions, or grow too fast, have their profitability destroyed. Why? Because businesses fail to differentiate their unique competitive advantages as their marketing budget is spread too thin.
To circumnavigate this problem, marketers must ask some hard questions. Look at your brand to understand which product lines or locations are not going to generate the value you need to grow. Shift focus to increasing value in the future and not towards legacy attachments.
The marketing challenge – if you choose to accept it
Brands have to find cut through. Clario.co discovered consumers are completely overwhelmed, as they are exposed to over 10,000 messages per day across online and offline platforms. However, this doesn’t mean we should stop marketing efforts, as doing so will impact the longer-term growth of your business.
Research by PIMS found a worrying impact on recovery when cutting marketing on Return on Capital Employed. It also discovered that upping marketing spend during a recession could actually support profit recovery and increase market share.
So, what should we be doing to make our marketing work effectively?
To answer this, we need to understand consumers, and how they think and behave when times become financially tough. Given the fact that consumer spending power has greatly reduced, with the Bank of England calling rising food prices ‘apocalyptic’, we need to understand people’s spending behaviour. This typically falls into three areas:
- Transactional savings – consumers search for registered discounts, coupons and mortgage deals. When businesses tend to focus on these, it can lead to a race to the bottom. The challenge is, once this economic period is over, it’s hard to increase prices accordingly.
- Accrued savings – people put more money in the bank as interest rates increase. The impact is people stop spending money, which in turn can trigger a recession.
- Mental savings – consumers will pay more for a product if they believe it will help them, either by saving them time or achieve something important. These savings become a necessity to that consumer, and one that they might even pay a premium for.
Building the mental savings bank
Brands need to focus on mental savings. Consumers will prioritise things that are of greater value to them. This links back to our earlier point; if you can narrow your product focus, you can help make your product/brand a necessity. With less distraction, it’s easier to recalibrate messaging to help people focus on an important personal trigger.
A great example of this is Hyundai in the USA. During the last recession in 2008, the US increased market share by 8%, helping Hyundai achieve a record profit of $832m in Q3 of 2009. All of this whilst the car market shrunk by 20%.
This success was mainly driven by the Hyundai Assurance Job Loss Protection program, which allowed owners to return the car if they lost their job. It identified the key fear consumers had about purchasing a big-ticket item and took it away. Refocusing messaging enabled consumers to see the car purchase as a mental saving, with peace of mind. In fact, it was so successful they introduced it again in 2020.
Consumers, quite rightly, have high expectations of how brands should behave, and which organisations really deserve their money. If businesses aren’t meeting their expectations, the longer-term consequences could be huge – especially given that over a quarter of customers will not buy a product if they have ethical concerns.
At the moment, many brands are still looking to put their profits before their customers. You just have to look at the P&O Ferries debacle; brands with poor excuses about pulling out of Russia when they invaded Ukraine, or those who looked to make a profit out of the petrol crisis.
Why bring this up? We are definitely seeing the rise of the recency effect. People remember the last experience they had when making a purchase and start to apply that everywhere. All the negative news and experiences (rising energy costs, food, petrol, poor client behaviour) are bringing heightened levels of anxiety around trust, price changes and the lack of stability. Everything is changing so quickly, and not for the better.
The only way brands can fight this is to focus directly on the fear which, at the moment, is uncertainty. Enter mental savings, and what Hyundai solved back in 2010.
Great, but what can we do?
Worryingly, this is only going to get worse as we teeter on the edge of a potential recession. It is, in part, due to the current war and humanitarian crisis in Ukraine, but also the impact that Covid is having in China. The Chinese economy is looking to plunge global supply chains into even more chaos (the consumer confidence index by YouGov has fallen from 109.0 to 106.6) and looks set to continue to fall. As a result, we have seen interest rates rising to combat inflation.
All of this does not bode well, but there is hope! It is important that, as businesses, we plan for inflation and growth, as well as inflation and recession. With the backdrop in place, and the knowledge of the importance of mental savings, what can marketers do to support their businesses?
- Think – don’t do anything to damage the reputation of the brand or business – it will stick!
- Recalibrate – make sure your product and brand become a necessity to customers. Prioritise and focus your marketing budget in the most efficient and effective way. Don’t spread it too thin, or you’ll get lost in the messaging people see every day.
- Bring certainty – help the consumer in an uncertain world. Continue marketing efforts, and perhaps invest further in branded PPC and paid social to stay front of mind. If you stop, consumers will think you don’t exist anymore – perfect for competitors to take advantage of.
- Experience – ensure your customer experience is right. Look at the whole customer journey and focus your communication in key areas. The digital proposition has a clear role to play across multiple different elements, so you don’t fall victim to the recency effect.
- Be loud – shout about the good things the business is doing. Is it sustainable? Great customer reviews/testimonials? Put these front and centre. People will be window shopping more than ever and these positive aspects can be the thing that makes them spend.
- Be transparent – in uncertain times, consumer trust dwindles so being transparent as a business is key. Be clear with pricing, stock levels, delivery/collection slots and opening times. By being open and helpful, people will remember your service for the right reasons!
Use data & never assume
Through all the ups and downs, data and measurement are everything. What is measured can be improved so don’t ever assume knowledge. With cookies phasing out next year, be ready to continue to measure all marketing activity. Have you set up GA4 yet?
In the meantime, use data to stay on top of what prospective customers are searching for and how they are behaving when they arrive on-site. Dive deep into the numbers to understand customers, what they are thinking, feeling and what keeps them up at night. This helps with recalibration, but also creates insight to help your brand become a necessity. Through uncertain periods, people’s searches and behaviour on-site will likely change, needing more reassurances before they buy. This could be using different queries and then navigating websites looking for answers. Track what people are searching for and then alter or add to content so it’s as helpful as possible in their buying journey.
By providing a good user journey filled with great content, companies will heighten their chances of improved organic rankings and a better Return on Ad Spend for paid activity. This means customers will likely return too.
And the future?
We know we are now in for a potentially long period of disruption and uncertainty, not only at a national level, but globally. We are all looking at what this means and how we can help our customers navigate this stressful and challenging time. Concentrate on becoming a necessity to consumers to help you prioritise and focus your efforts in the best possible way.
The good news is the current financial climate is not going to last forever, so plan accordingly! To date, there hasn’t been a recession that lasts more than a couple of years. Think long-term as it can be easy to focus on the now, especially during difficult periods. Consumers will spend – they’ll spend on things they need, and they’ll spend on things they want. The challenge is to be a need in an environment with diminished spending power. Challenge accepted?