Inflation in the European Union was at an all-time high last year, and it’s not expected to go away any time soon. In fact, the European Central Bank predicts an average inflation rate of around 7 percent for 2023. So what does that mean for your retail business?
Though inflation isn’t inherently bad (a low inflation rate can actually be a good thing for the economy), high rates like this can have devastating effects. Especially for consumers.
How inflation hurts consumers
For consumers, high inflation brings two major issues:
1. Less purchasing power
When prices go up across the board, consumers need more money to buy the same things, or on the flip side, they can buy less with the same amount of money. In other words, their purchasing power goes down.
Because of that, they have to be more considerate about what they spend their money on and may even need to make some sacrifices to make their budget work.
For example, someone may choose to give up their Netflix subscription so they have more money left over after gas and groceries that they can put towards other things, like their gym membership.
Those already dealing with financial difficulties before inflation hit will be put in an even tougher spot. As their purchasing power goes down even further, they may be forced to choose between essentials since they probably weren’t doing a lot of discretionary spending in the first place. Instead of giving up their Netflix subscription to keep their gym membership, they might have to choose between gas and groceries.
2. Fewer savings
When inflation goes up, it doesn’t just affect what consumers can buy, it also impacts what they can save.
Since prices are rising and consumers are having to pay more, they won’t be able to put as much money aside and they may even have to dip into their existing savings to stay afloat. Unfortunately for them, even if they built up a fairly hefty savings account in the past, their existing savings are worth less now because, you guessed it, inflation reduced their purchasing power. It’s a vicious cycle.
4 ways inflation affects buying behavior
The impacts of inflation have consumers concerned. You may have already noticed some changes in your customers’ behavior, as they rethink their budgets and tighten their purse strings. Let’s take a closer look at how they might be changing their buying behavior in the face of high inflation.
1. Consumers choose lower prices
Faced with lower purchasing power, customers may look to buy products at lower prices, even if that means they’re buying smaller quantities or shopping from somewhere they wouldn’t usually shop from. They may even switch to cheaper brands like private labels in an effort to save more.
2. Consumers use promotions and discounts
Since customers have a lower purchasing power, promotions and discounts help them to make their money go further. That’s why they use coupons, shop during clearance sales and look for other special offers where they’ll be able to save some coin on their purchases. They’ll be much more willing to spend money if they feel like they’re saving some.
3. Consumers are much more selective
Customers will do a lot more research before making a purchase, and will carefully review their options before taking the plunge, making overall more considered purchases. Extras and conditions that were previously just “nice-to-have” will also impact their purchase decisions. If the full package doesn’t satisfy them, they won’t buy it.
4. Consumers stop shopping
Some shoppers may just stop shopping, sticking to the essentials and not buying anything else, until inflation goes down again.
3 things you can do
1. Be strategic about price increases
Price increases are probably inevitable but you need to be careful. You don’t want to give your customers the impression that you’re passing off all inflation costs to them or worse, taking advantage of the situation to feed your profits.
Refrain from raising prices across the board. Take a look at your categories, and adjust your pricing strategy based on category profitability as well as customer price sensitivity, only raising prices in categories with really tight margins where customers will still be willing to pay the higher price.
Most importantly though, be transparent about what’s happening. If you give your customers clear information about where and why you’re raising prices they’ll be more accepting of the changes.
2. Use promotions and discounts carefully
Sales and promotions will help bring customers in, but you’ll need to make sure they don’t affect your bottom line. Especially in this economy.
If you want to run some promotions, consider doing conditional ones with spending thresholds or BOGO bonuses so that they don’t mess with your margins too much. Also, take a look at your data and make sure to evaluate the overall cost of your promotions. It may be worth holding back on some of your promotions or sales if it means you can keep prices lower year-round.
3. Provide added value with production protection
Inflation makes customers warier in making purchases, and they’ll spend more time than they used to researching retailers and comparing their options. Speed up the purchase decision and persuade consumers to choose you — with additional offers like product protection.
It’s an incentive that works! Giving your customers the option to add product protection to their purchases reduces the risk associated with the purchase because they know that if something does happen later down the line, they’ll be able to get it repaired or replaced without having to cough up another penny. That way, they’ll feel more confident in buying something from you.
Sound good? We make it easy to get started. We build product protection plans that your customers will love and develop the technology you’ll need to sell them at any stage of the customer journey, both online and offline. The best part? You’ll also make additional revenue since Hakuna will pay you an attractive commission on every plan you sell.