Inflation. It’s the big story in just about every country. After hitting a 40-year high of 8.6% in May 2022, consumers in the United States are struggling to come to terms with rising prices after decades of relative stability. For younger generations of consumers who’ve never encountered inflationary price hikes, the current trend has come as a shock.
We’ve heard all the stories about how consumers are increasingly ‘going without’ as prices rise across every product category. Even for shoppers that aren’t as severely affected, they’re being increasingly selective about what they’re buying.
This isn’t just bad news for consumers. It’s also a tricky time for the brands who are trying to sell to them.
As a business, rising inflation can feel like a game of whack-a-mole. Trying to grapple with higher operational costs while retaining consumers at risk being enticed by cheaper options can seem like an impossible task.
In the blog, we’re going to explore this current wave of inflation and what brands can do to continue attracting customers. Read on!
After a long tenure when money has stayed cheap, recent record inflation has come as a shock to many consumers, This is especially true for the Millennial/Gen Z camp, who are too young to have experienced the inflationary shocks of decades past.
But the legacy of current rates of inflation is much more complex. Higher government spending to offset the impact of the pandemic left consumers with much healthier savings than normal, but ongoing supply chain issues have meant that for the past two years, supply has been struggling to keep pace with demand.
This imbalance led to price increases on a multitude of raw materials and products. Paired with additional disruption from the Russian war in Ukraine and a red-hot labor market, this has created a toxic storm of rising prices prompted by higher operating costs. With stimulus money finally petering out, consumers have been left to navigate this inflationary retail market.
In the second quarter of 2022, consumer sentiments have undergone a significant shift compared with the beginning of the year. According to Jungle Scout’s Q2 Consumer Trends Report, 77% of consumers surveyed stated that rising inflation had affected their spending habits, while 32% said that their personal spending had dropped.
So, it’s clear that the vast majority of consumers are feeling the pinch of rising prices. The question is, what are they doing to try and ease the impact?
According to the survey, consumers are responding to inflation in many different ways:
Naturally, inflation doesn’t spell good news for businesses that sell discretionary products. When budgets tighten, it’s the fun, not essential extras in the shopping cart that are usually the first to go.
Thanks to the huge breadth of their product offerings, Target and Walmart’s most recent earnings calls provide useful insight into what consumers are spending money on – and what they aren’t.
While sales are up by 3% from last quarter, Walmart is experiencing a notable shift in customer spending, with purchases from private-label brands on the up while discretionary spending is down. Likewise, Target has reported that spending on food, beverages, and perhaps surprisingly, beauty products have stayed strong, while demand for big-ticket items like exercise equipment and electronics has dropped.
It’s worth noting that recent increases in inflation have dovetailed with a shift in post-pandemic spending habits. With many people now returning to the office and in-person leisure activities, the demand for popular stay-at-home pastimes, like home exercise and loungewear, is now waning, while formal apparel experiencing a comeback after two years of flat demand.
However, not all discretionary spending is affected equally. A legacy of the so-called ‘K-shaped’ economic recovery from the pandemic, affluent U.S. shoppers are continuing to spend big on luxury products.
Luxury conglomerate LVMH saw a 29% growth in revenue during Q1 alone. Unlike the much more crowded mid-range marketplace, luxury fashion and accessories aren’t under pressure to compete on price, but exclusivity. However, the war in Ukraine and the zero-covid approach in China are likely to dampen growth during 2022.
It can seem impossible as an independent brand to do anything that could change consumer shopping behaviors during this difficult time. But consumer research shows that this isn’t quite true; with some well-targeted initiatives, merchants can set themselves up to weather tighter spending better than others – and put themselves in a stronger position for when inflation eases.
Here are five areas that brands should be focusing on right now to keep driving sales:
We’ve spoken a lot about Buy Now, Pay Later (BNPL) on this blog, and with good reason. In regular economic conditions, deferred payment plans from the likes of AfterPay and Klarna give credit-conscious shoppers an alternative way to purchase the goods they want. But during a time of high inflation, Buy Now, Pay Now is essential for many consumers to manage rising prices and lower budgets.
A C + R Research survey from last year found that 59% of respondents had used a BNPL service to purchase a discretionary item they couldn’t afford outright. But according to Salesforce, the use of Buy Now, Pay Later plans as jumped 66% YOY. This is a clear sign that consumers are feeling the pain of rising inflation.
If your business doesn’t currently offer BNPL as a payment option, now is the time to consider adding it to your arsenal. Without it, many consumers will not consider shopping with your brand – especially if your competitors offer the service.
It’s important to note that different consumer segments will respond to inflation in different ways. This means that the impact of inflation on your business will depend on who your customers are.
For example, research shows that Baby Boomers are the most sensitive to rising inflation, perhaps due to the likelihood of fixed incomes and prior experience living in an inflationary economy. Although Millennials (79%) are more likely than Baby Boomers (77%) to say that personal spending has been impacted by inflation, their response is very different.
In fact, 69% of Millennials say they are tempted to make a purchase when they see a discount, versus just 33% of Baby Boomers. Conversely, Millennials (79%) also report lower levels of satisfaction when saving money than Baby Boomers (94%). In sum, this suggests that Millennial consumers are less likely to get put off by higher prices and look for alternative ways to get what they want.
For brands, focusing on your Millennial consumers is your best bet to help you get through this tricky economic period.
The cost of shipping has always been a pain point for online shoppers, but this has only worsened as inflation has risen. Tighter discretionary spending is only going to make consumers more sensitive to extra dollars being added at the checkout.
With 68% of consumers now making sure that they spend enough online to qualify for free shipping offers, your business can reap the rewards of these thriftier, inflation-era habits if you have a free shipping threshold. This is where customers must spend a minimum amount in one transaction to qualify for a free shipping offer.
Your minimum order value should be high enough to encourage shoppers to spend a little extra, but not so high that they go looking for a cheaper competitor. Well-targeted incentives like this show your customers that you are aware of the impact of higher prices and are looking for ways to help them obtain the goods they need.
While it may be hard to see any positives to rising inflation, there is one noticeable upside for brands. Rising prices and tighter household budgets result in what is often referred to as ‘loyalty shock’, or a greater willingness by consumers to experiment with brands and product offerings they haven’t tried before.
Loyalty shock was a common feature during the early part of the COVID-19 pandemic, where supply chain issues meant that many shoppers were unable to access their preferred brands. In 2022, it’s growing price sensitivity that’s pushing consumers to downgrade to cheaper labels for essential items or look for additional perks such as discounts or shipping promotions.
In sum, these changing consumer behaviors present a valuable opportunity for brands who are willing to be flexible and adapt to the current economic outlook. More shoppers willing to experiment with your brand can be a great boon – if you know how to retain these customers over the long term. This is why promotions should still be targeted toward your intended customer base to avoid high rates of customer churn.
As we stated above, loyalty shock is an opportunity to convert new customers – but also a challenge to keep a hold of the customers you already have.
It’s a well-known fact that existing customers are much more valuable to your business; a one-time buyer has only a 27% chance of returning to your store, compared with a 54% chance after three purchases.
In sum, the more that your customers purchase from you, the more likely it is they will do so again in the future. During tough times like periods of high inflation, customer lifetime value can be the difference between your business surviving or thriving.
So, how do you foster this long-term repeat purchasing behavior in your customers? It all starts with loyalty initiatives.
Most loyalty rewards programs end up stagnating either because the most desirable perks are too difficult to reach. According to the 2021 Premium Loyalty Data Study by Clarus Commerce, 79% of consumers aren’t interested in point-based programs, while 40% expect benefits immediately once they sign up.
Launching a premium not only gives your business an additional revenue stream; it also gives your customers more reasons to stay loyal.
While paying to access perks like free shipping or exclusive discounts might seem counterintuitive, especially during a time of inflation. But to consumers, an upfront membership fee is an investment in future savings; 62% of consumers say they are more likely to spend more on the brand after subscribing to a paid loyalty program. To find out more about premium loyalty programs, check out our guide.
With inflation set to continue for a while yet, now is the time for brands to start digging in and putting in place longer term strategies to deal with more cautious spending habits. Growing your business during such a challenging time requires a war on both fronts; attracting new customers while ensuring that your existing customers are happy and satisfied with their experience. By putting in place some well-targeted initiatives to remove friction from the shopping journey, you can ensure that consumer spending at your business stays strong.