This year, we can expect plenty of caution from consumers as they deal with a reduction in purchasing power. Savvy customers will be more inclined to shop around, and quick to switch from their usual brands if a better alternative is available. On a brighter note, however, plenty of shoppers are still open to new experiences; especially where brands can demonstrate the ability to really meet their needs and deliver value.
With the cost of living crisis predicted to linger well into 2023, here’s a closer look at its impact on consumer sentiment; the knock-on effect on behaviour, along with our take on how businesses should respond.
Cost of living crisis: the consumer effect
Annual inflation seems to have now reached its peak. Wholesale energy prices (the main driver of that inflation) have reduced sharply from the eye-watering levels seen in the summer. In further encouraging news, it seems that the Bank of England’s base rate isn’t going to be raised to anywhere near the levels touted in the aftermath of October’s ill-fated mini-budget.
There’s no getting away from the fact that this year is going to be a tough one. However, looking at things from a glass-half-full perspective, it does seem that the economy will move back into growth mode by the end of 2023.
So how does all of this translate into consumer behaviour at present? First off; loss of purchasing power. Below-inflation pay rises mean that customers are having to adjust their spending habits to make their incomes stretch further. By way of illustration, figures from Barclaycard suggest that more than half of Brits have cut back on discretionary spending - things like restaurants, new clothes and one-off treats - in order to pay for the essentials.
Secondly, sentiment; i.e. how consumers actually feel about their finances and their attitudes towards spending. The most recent confidence index figures from DfK and PwC all show that consumers are in a sentiment trough at present. Pessimism about the immediate future means that the appetite for spending is limited. So particularly for bigger-ticket items - things like home improvements, holidays and appliances - brands are going to have to work extra hard to demonstrate core selling points (e.g. good value, longevity and exceptional performance) in order to coax customers into the market.
We’ve honed in on a couple of key sectors to illustrate how all of this is actually shaping consumer actions…
Retail spending
McKinsey found that 81% of Brits have changed their shopping habits in some way as a result of cost-of-living pressures. Millennials and Gen Xers seem to be feeling the pinch the most: 64% and 65% respectively say they intend to buy fewer goods and services in the face of rising prices. This compares to 50% of Boomers and Gen Zers.
For marketers, it’s clear that existing customer loyalty cannot be taken for granted: good news for potential customer acquisitions, but something to pay close attention to on the retention front. Customers are much more willing to step out of their comfort zone and try new behaviours in their quest for value, including switching brands, retailers or channels. The younger the consumer, the more likely they are to consider a major change. For instance, McKinsey shows that 27% of Gen Zers would consider trying a new digital shopping method (e.g. ordering food via an app), compared to 10% of Gen Zers and 4% of Boomers.
Consumers are still willing to spend on non-essentials. What many of them will really appreciate, however, is a helping hand in spreading, managing and tracking the cost. GWI pointed to a 29% increase in the take-up of “buy-now-pay-later” type arrangements last year. Other initiatives retailers may wish to consider to offer practical support to shoppers include timely promotions, vouchers, coupons and in-app spend-tracking functions.
Fitness and wellness
According to YouGov, 5 million Brits have either cancelled or are considering cancelling gym or sports club memberships as a result of the cost-of-living crisis. Once again, it’s a case of gym consumers taking a pretty ruthless approach to existing relationships with brands, and ditching those that are no longer deemed worth it.
Businesses within the fitness and wellness sector - especially those that operate a subscription charging model - may benefit from introducing a greater degree of flexibility to attract and retain customers. Direct debits, convoluted cancellation procedures and long notice periods are a huge turn-off right now. If customers know they can dip in and out of your service offering and “pay-as-you-play”, it could be a much better fit for their circumstances.
Now more than ever in fitness and wellness, it’s a case of keeping your customers close and tuning into the issues that are most important to them: everything from tackling insomnia to accessing credible, personalised advice.
Marketing and advertising
Evidence suggests that lots of businesses are keen to protect their marketing budgets as part of their strategy for responding to the cost of living crisis. The latest IPA Bellwether report suggests that four in ten UK firms expect to actually increase their marketing spend in 2023/24, with just 15.3% expecting cuts. We anticipate, however, that the pressure to demonstrate a return on investment will be stronger than ever. Performance monitoring is key here: i.e. taking a hard look at existing marketing strategies, assessing what is and isn’t working, and making changes where necessary.
How should brands respond to the change in consumer behaviour in 2023?
According to the consumer insights platform, Zappi, 85% of consumers think brands should cut down on marketing spending to tackle rising costs. It’s a reminder that when deciding where and how to deploy your marketing budget, sensitivity is key (if you are having to raise prices while simultaneously launching a highly glitzy campaign, it’s not always a good look!). Now especially, customers are much more likely to appreciate practical support; things like clear information attuned to their needs, transparency around issues such as pricing, along with a timely reminder of why they were drawn to your brand in the first place and how you can deliver real value.
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