Daily economic news in Canada and around the world is replacing my desire for suspense novels. Every day, we are seeing new financial lows and ominous warning signs to make any brand get nervous. Household indebtedness is an important number to watch because it tells us how much disposable income consumers have to spend on our brands.
Canadians are leveraged through the Teeth
Statistics Canada reported that the ratio of household credit-market debt to disposable income rose to its highest level of 173%! Total credit-market debt reached $1.89-trillion in the third quarter another record. Mortgage debt makes up 65% and the other 35% is consumer credit, such as credit cards, car loans, personal loans, etc. If we assume most of this debt resides with people aged 20 to 65 years of age, the average consumer debt (not including mortgages) is $25,744. The Bank of Canada sounded the alarm that household indebtedness and imbalance on the housing sector are key vulnerabilities to the financial sector. In particular there is a segment of younger households with debt-to-income of 350% or higher!
So what does this all mean for brands? The ultimate outcome is consumers have less disposable income to spend on brands. Decrease spending on brands means decrease profits.
But looking just at the wallet isn’t the only thing we have to be concerned about. We also need to understand what consumers are thinking and feeling. Are they optimistic or pessimistic about their future and money supply? Some economists say consumer expectations concerning economic conditions tend to be a self-fulfilling prophecy. If they expect doom and gloom, the economic conditions worsen because they stop consumption. But in most cases they just follow reality.
A Storm Is a Brewin!
There are a number of possible storms that can trigger a negative change in consumer consumption such as:
- A recession or economic downturn with loss of employment
- Physical disaster or state of war
- Increased interest rates
- Increased government taxes
- Hard to borrow money or obtain credit
- Housing bubble burst
- Fear and political instability
All or none of these could happen. If I knew, I wouldn’t be writing this article. I would be too busy spending my millions from my last successful financial prediction. If any of these storms appear, brands need to be prepared and take the necessary steps to respond to the market and adjust their brand strategies appropriately.
Consumer Mindshift in a Storm
In a time of uncertainty and fear of losing one’s job or investments, consumer purchasing habits will change and in some cases drastically. Most brands have a knee jerk reaction not dissimilar to their customers by cutting costs, including advertising, reducing prices and postponing new investments. Harvard Business Review has analyzed historical market downturn data since the 1970s identifying four distinct psychological groups of consumers in hard times:
Slam-on-the-brakes
This is the group that is directly hit with financial pain and reduce all types of spending. It might be futile to go after this group if they truly are strapped for money or credit.
Pained-but-patient
This group tends to be the largest group who aren’t as pessimistic as the slam-on-the brakes but they too economize in all areas. As the bad news gets closer to home they can easily migrate to the slam-on-the-brakes group. Let’s hope it’s not the middle class. MoneySense estimates 60% of Canadians fit in the middle class (based on 2013) and have an average family income between $40K to 125K (a difference of 200% from the lower-middle to the upper-middle).
Comfortably well-off
Like the title describes, these consumers feel secure to ride out the difficult times but are more selective and careful about their purchases, it’s less about their pocket-book but more about image. This group is generally part of the top 5% income bracket.
Live-for-today
This group is less concerned about the downturn (if they are aware of it) and make little changes in their buying habits focusing more on experiences rather than stuff (except technology like smartphones, tablets, etc.). The only way this group’s consumption pattern will change is if they become unemployed. This is the group that has great parties every weekend. I want to be friends with these guys.
Remember, these are just generalizations but can help in setting your brand strategy when the economy gets difficult.
The main issue that brands need to address is price and value if they want to connect with the largest group (pained-but-patient) unless they feel they can survive with the top two groups. WPP, the world’s largest multinational advertising agencies, says in a study that brands need to face the reality of the situation and address customer needs by showing a sense of honesty and care. There are intelligent ways to acknowledge the problem and to reinforce your brands positioning and relationship. Similar to customers, brands must make difficult decisions with limited resources. But most importantly, don’t stop communicating to your customers in some way or fashion.
5 Tips to Manage an Economic Storm
Here are some possible tips for your brand to get customers to pull out their wallets, debit cards and credit cards during economic challenging times:
Create Added Value
Justify price – demonstrate superior performance and value, product comparison, and testimonials, are some examples.
Add features and services – free support & servicing, check-ups, extra quantity, extended warranties, free shipping or setup, and choice of colours, are some examples.
Economy sizes – buy more, get more – you are positioning savings, retaining sales and not sacrificing value. This is the Costco model of buying bulk.
Do it yourself – The IKEA model. The perception that you have to assemble it means you will be saving money – or just creating more pain at home – “what do you do with all the extra bolts and screws they give you or should there be extra?!”
The Screaming Deals
Create urgency that this is the best-time to be buying your brand. Pull out all the starbursts, yell and scream – “We have a deal for you!” Art directors will cringe at the thought of this but it does work. Everything from price discounts, promotional and special offers, contests and giveaways. Remember, all you are doing here is renting customer loyalty in the short-term but it will help keep the cash flowing.
Reduce Risk & Barriers
Show that you brand cares and understands the situation customers are facing in difficult financial times. Provide alternative payment options – nothing down, don’t pay until next year, zero percent interest payments, free financing, no-credit-check, job loss protect, etc.
New Innovations and Technology
Make consumers forget about the bad times and create excitement towards a new product with never seen features or never experienced benefits. For many brands this might be difficult to accomplish in a short-time frame. But you can adjust your brand to have new efficiencies or reduce costs. Reduced costs can be accomplished many ways such as production efficiencies, cheaper ingredients, smaller package size, single servings, and slimmed-down basic version with no bells or whistles. So if you can’t wow your customer into buying your products, then reach out with an offer they can’t refuse. Chances are they will end-up buying the more expensive version but the less-expensive version got them through the door.
There have been many new products successfully launched during difficult financial times such as Rice Krispies, Plymouth and the iPod.
A Beacon in the Storm
The smart brands not only weather the storm but they continue to strengthen their brand relationships. Remember that your best customers can be your best backer during difficult times. With the help of social media they can quickly be mobilized to get your brand message out – from a simple customer referral program to getting “likes” for a new product. Always talk about the value your brand brings –the rational and psychological. Tap into the concepts of small indulgence, sharing and helping. Do random acts of kindness like Starbucks did with #TweetACoffee campaign where people were encouraged to buy a friend a coffee using twitter, or Coca-Cola’s #WishUponACoke campaign in Dubai where they fulfilled wishes for immigrant workers who left home for a job.
Weathering the Storm
John Hayes, American Express CMO said at the American Marketing Association’s MPlanet 2009 conference “Consumers are more likely than ever to award their hard earned dollar to those brands that provide the greatest value, build the strongest relationship and connect in the most meaningful way.”
Keep an eye on the economic weather and have a plan ready if a storm should hit. Remember as you scrutinize your customers to determine if they can pay, they too will be watching your brand on how it also handles tough times.
