Preparing for A Recession: Changing Customer Demand

The lead article in The Daily Telegraph on Saturday was "Austerity Britain: Families Cut Out Luxuries" and this has made me think about how the talk of the prospects of a recession is changing customer demand.

I am going to look at the effects of a possible recessions and its impact of customers and their purchasing but first I want to explain my take on what is happening in the UK as this colours my later comments.

What Is Happening In The UK?

Will there be a recession in the UK? The official economic forecasts still say no. Growth is expected to fall to 1.5% from recent 3% levels and a post Second World War average rate of 2.25%.

But the official forecasts are not reflecting what is really happening in the economy.

We have a government and Prime Minister who are not providing the leadership required. Politically the UK looks lost. Several years away from an election, a weak Prime Minister is struggling to control his own party and the main opposition appear little better, gaining popularity in polls only through contempt for the incumbents.

Petrol prices are up, food prices are up, housing costs are up. Taxes on the poorer paid working families is up. The official rate of inflation has little connection with the rising costs families really face.

House prices are falling and the savings ratio has been eroded over the last ten years from about 10% of GDP to 2% while consumer borrowing for personal debt and equity released from the housing market is high.

Consumers Disposable Income

From my high school economics I remember the definition for aggregate demand in an economy as C + (I - S) + (G-T) + (X-M)

where C= Consumption, I = Investment, S = savings, G = Government expenditure, T = Taxes, X = Exports and M = Imports.

It occurs to be that we can use this same logic to identify the money a consumer has to spend:

= Income - Taxes - Savings + Borrowings

Attempts are being made to peg Income to the consumer price index although as mentioned earlier, this doesn't reflect common household costs.

Savings

Savings can be positive where people try to save more out of their income to provide a rainy day fund or negative as people cash in their savings to spend.

Currently the savings rate is very low and has been falling. Across the social-economic classes I suspect that the only people who have saved in recent years are the people who have earned enough to meet their consumption desires and had money left over.

A quick check back on history shows that the savings ratio has been highest when the economy is in recession, peaking in 1980 and 1992 so this indicates that change from spending post savings to saving income could be a significant reduction is disposal income a consumer is prepared to spend.

Borrowings

While savings and borrowings may be considered opposites, I have separated them out to help identify the factors.

Consumer debt is already high and many people have hit their borrowings limits. It is a simple fact, what you borrow one month, you have to pay back in the future.

I can see less money available for new consumer debt so again we will see a swing which reduces the money available to spend.

Changing Spending Habits

The Daily Telegraph reported that spending habits were already changing noticeably as families adjust to the economic squeeze and the prospects of a recession.

1. Move to lower priced stores -  Discounters like Primark and Aldi are reporting increased sales
    
2. Holidays abroad switched to the UK - enquiries for British holidays are up by nearly 50%
    
3. Mintel report that 57% of consumers have cut back on their spending - 20% have delayed a holiday while 11% have put off home improvements
    
4. Discount hotel group Travelodge  report bookings 22% up on last year for the May bank holidays and Premier Travel Inn report sales up 10.5% on last year but overall hotel occupancy fell by 1.3% in the last three months.
    
5. Short term hire is replacing replacing ownership with the Fractional Life website (a comparison site of 300 rental, leasing and collective ownership sites) reporting traffic up 90% in the last six months.

Preparing Your Business For A Recession

Consumers will continue to spend but it appears that they are already spending less.

So the question is, how can you prepare your business for the changes in consumer demand on the basis that change means problems for some but opportunities for others.

The Value Price Line

In general every market is characterised by a value price line where low priced products provide the basic functionality required and as price increases, the various components of value increase.

Let's just look at the car industry as a simple, easy to understand example.

There are many new four door saloons, ranging from a Proton for £9k through to a Maybach for £345k.

As the price increases there has to be a reason (some dimension of value) to justify spending more.

So take a look at your market and draw your own value price line.

Plot where your firm is and your competitors.

Is there a gap which doesn't seem to be covered very well?

Can you take advantage by positioning your product in the gap with enough credibility (e.g. it is no use Proton spotting that there is a gap between £35k and £45k) to attract buyers.

There are only three ways to fill the gap in the value price line:

1. Reduce the price of an item from above - but we know that reducing price has a big impact on reducing profit.
    
2. Increase the price of an item from below and add on extra value to justify the increase
    
3. Designing the product for the price point, taking away an unnecessary and unwanted extras.

I realise that cars are a long term development project but it is this principle I want you to think about.

If customers want to pay less, can you design a special product so that those still wanting the full service option and prepared to pay for it don't get a free ride.

Temporary Fix v Long Term Solution

As explained above, there is a move to short term possession or shared ownership so is this something else that you can offer?

Cannibalisation Of Existing Demand

This is a big problem and rightly a big concern.

If you are too active in offering lower priced alternatives, will you "sell" your buyers on the lower priced option rather than the higher priced item they usually buy?

Yes it can happen but the dangers can be reduced.

First, develop your lower priced solutions. If you don't your competitors will and will try to tempt your customers away. If a customer who previously would have paid £1,000 to own a Gucci handbag, now is looking to hire a bag for two weeks and pay £100, then they will search for this opportunity.

Two, work on your sales questioning techniques for what the customer is after. The more you understand what they want and their budget, the more you will be able to offer the right things. Really try to tap into what is is that the customer wants to achieve. You are the expert in your products so they may mistakenly believe that a lower priced item will give them the solution they want but you may know better.

You are doing the customer a disservice if you keep this knowledge to yourself and they walk away with a low priced item which doesn't give them the benefits they desire.

Three, pricing theory indicates that it's best to start with a high reference price and to work down to lower priced more affordable offerings by emphasising what the customer is losing from buying the lower priced item.

Four, don't forget to offer an upsell after they have agreed the purchase. Any extra profit you make is important so don't forget to offer the batteries, the spare printer cartridges or the three year warranty. The customer can say No but if you don't ask, you will never know.

To Your Success

Paul Simister

Your Profit Coach, business coaching for customer focused entrepreneurs

© Planning & Control Solutions Ltd 2008 All Rights Reserved

Business Problems Try A Business Health Check

Business failure & the role of management

Business coaching in a recession

  If you like this article please Stumble it or Digg it so that you can find it again easily wherever you are. The AddThis button makes it easy to post it to your preferred social booking site.