The economy may begin to recover later this year, but consumer demand could remain suppressed. Here's why and what you should do about it
Most economists anticipate the economy to rebound sometime in the third quarter of 2009. Credit markets are thawing, consumer confidence is inching up, and unemployment rates, while historically high, are at beginning to ease. Despite these positive signs, companies should be aware that customers might not come roaring back immediately.
Why not? There are two main reasons: psychology and mathematics.
From a psychological perspective, several million young adults—people in their "economically formative" period—have developed lasting impressions about being cautious and thrifty with their money.
More generally, the recession has been potent enough to interrupt longstanding buying habits, forcing people to reconsider purchases that were typically easy decisions. After a period of reassessment and change, these new behaviors (in this case reflecting cost sensitivity) become routine and, ultimately, entrenched.
Beyond these changes to consumer psychology, the simple mathematics of household economics will dampen demand for years. Families have increased their debt by about 40 percent since 2000. They are also increasing savings to replace the wealth lost through declining home and stock prices. The overall downward pressure on consumer income growth will continue to tighten discretionary income.
Simply put, households will have to under-consume in the future to pay for their over-consumption in the past. This, in turn, will lead to companies competing for a smaller amount of consumers' money.
There are four key ways to keep—and grow—customers in a world of limited demand:
Make high-order emotional connections
Even the hardest hit consumers reward favored brands with loyalty. The best way to earn that loyalty is by creating a shared belief between a brand and its consumers that spans beyond the category. A common purpose, passion or philosophy leads to bonds that are surprisingly hard to break. For Mini Cooper it's "the awesomeness of small" and for Southwest Airlines it's "freedom to travel."
Introduce rearguard brands or brand extensions
Companies don't have to lose share of wallet when consumers trade down. Companies like Procter & Gamble (PG) are introducing less expensive extensions of their flagship brands like Tide detergent, Charmin toilet paper and Bounty paper towels. Executed well, such additions to a product portfolio will not erode the equity of their premium versions.
Catch "category jumpers"
Beyond trading down, consumers are quitting some categories altogether. Smart companies are tracking categories adjacent to their own and actively targeting defecting customers. For example, consumers cutting back on dry cleaning can be converted to home laundry products.
Remove purchasing obstacles
Find and remove obstacles between your customers and their purchase of your products. Hyundai recognized the fear of job loss as a major barrier to purchase, and addressed this shift by creating a buyback guarantee program.
The outlook for a short- to mid-term bounce back in consumer demand is bleak, but by companies anticipating it and adjusting their customer-facing strategies, it increases its chances of winning a bigger piece of a shrinking pie.