The “R” Effect: How to Adapt Your Business to a Fundamental Shift in Customer Behavior

The “R” word has returned. Politicians may have been slow to call this crisis a recession, but business has known better for some time. Many countries in the developed world have already experienced two consecutive quarters of contraction in gross domestic product, and others will in the very near future. In economies that are dependent on consumer spending, rather than business or government spending to drive GDP, businesses need to be sensitive to changing customer behavior.

At household level, we already saw evidence of three key indicators of recession:

1. Deferral. Households are postponing purchases of big-ticket items such as cars, property and major household appliances.
2. Reduction. Households are reducing the amounts they spend on some categories of product or service. They are dining out less often and taking fewer vacations.
3. Down-shift. Households are trading down to less costly options. If they have to buy a car, they are opting for used vehicles. Sales of generics are rising, at the expense of premium brands.

It is clear that consumers are worried about the future and not enjoying the present. Their behavior is changing, and it is unlikely to revert until they are confident that the economy is going to pick up and their jobs and homes are safe. One highly significant indicator of the depth of this crisis is household spending on food. Data from the United Kingdom shows that for the first time in 20 years, householders are reducing their expenditure on food. Make no mistake, this very serious. We are in deep.

So, what should you do about this?

I think you must acknowledge that this is a fundamental shift in consumer behavior. It is here to stay for a considerable period of time. Some pundits are suggesting that it will last until 2010-11. There will be a top-line revenue consequence that is unavoidable. Because these market gyrations are driven by a lack of consumer confidence (fear, if you prefer), they are beyond the control of any single business. There is simply no point in maintaining your ad spend and trying to battle your way through the downturn. These macro-environmental conditions are mightier than your advertising budget. If you continue with Business As Usual, you will struggle and you may fail.

Seven strategies

In practical terms, what can you do? Here are my “Magnificent Seven” suggestions that are necessarily more strategic than tactical:

1. Protect your most valued customers. There has never been a better time to analyze your customer base and to ring fence those customers that contribute most to your business goals, be that revenue or profit. Those are the customers that are least likely to change their habits. They don’t defer, reduce and down-shift, or if they do, it’s to a much lesser degree.
2. Re-invent your offering. It’s time to eliminate features that deliver little or no customer-perceived value. If customers are down-shifting, they won’t want to be paying for product features and service levels that they don’t value.
3. Restructure your product line. If you don’t have an entry level or no-frills offering, now is the time to consider introducing one. You might be able to capture customers, as they exit your regular offerings—before they go to a competitor. You might also position yourself to capture a greater share of competitors’ customers.
4. Cut your marketing expenditure. It pains me to say this, but you have to review your marketing expenditures and eliminate those costs that are of questionable value. Advertising that has no measurable return? Cut it. Web-site upgrade? Postpone it. Partner promotions? Slash them. Review your marketing budget and reduce where you can. It’ll be a battle, but this is a great opportunity to return to zero-base budgeting, where nothing has an inalienable right to be a budget line-item.
5. Use the technology you’ve paid for. Do you pay a license fee for technology that you don’t use? Perhaps you have an enterprise application from SAP that offers sales, marketing and service functionality and you aren’t using it. Now is the time to find out what it can do and to experience the efficiency and effectiveness gains that well-deployed technology can deliver in the front office.
6. Automate processes. Marketing, sales and service processes that are hand-built cost much more than automated processes. An automated campaign management process strips cost out of the campaign development and measurement process and adds measurability. Motivate customers to use low-cost transactional and service channels.
7. Focus resources. As you cut back on unnecessary sales, marketing and service expenditures, the temptation is to spread what remains thinly across products, brands, markets or customers, each getting a share. Resist! Imagine that you are a miner. What do miners do? They invest where the yield is greatest. It’s called the high-assay method, and it’s highly appropriate to these times. If it means supporting some products but not others, that is the short-term price you have to pay.

Recognize that this crisis has forced a fundamental change in consumer behavior, and it’s time to revert to prioritizing need over want. Households are deferring, reducing and downshifting. Because you cannot resist this trend, you must adapt, and prepare yourself for a long period of tough trading conditions.