The number one concern for customers, businesses and Governments at the moment is inflation. One of the reasons that it is such a big issue is that most of today’s leaders have never had to deal with inflation, the last outbreak in the developed economies being forty years ago.
As somebody who was running businesses in the late 1970s, who has over forty years of experience with customer insight, and an economics degree, perhaps I can share some information and advice.
Why is Inflation Bad?
The key problems with inflation are:
- It reduces purchasing power. If prices go up by 10%, then consumers can only buy 90% as much stuff for the same amount of money.
- It feeds into higher costs. Workers need to increase their salaries, imports cost more, energy costs more, and borrowing money costs more.
- It makes everything more volatile. In inflationary times it is riskier to negotiate a three-year deal with a client or supplier.
- Exchange rates between countries become more volatile. This makes it harder to buy products and services internationally, and it makes it harder to sell and deliver international projects.
- It usually makes society less equal, people on lower incomes tend to spend more of their money on items that have the highest inflation
- Interest rates go up, so interest repayments become much higher.
- The things Governments tend to do to control inflation can, and often do, cause a recession.
What does inflation do to Customer Experience?
The three forces affecting customer experience during inflation are reduced customer spending power, increased prices, and the need to cut business costs.
Reduced customer spending power does not impact everybody in society equally. This is why the impact of inflation differs from one product or service to another.
If somebody is faced with a reduction in their spending power, they have to decide what they are going to buy less of. For example, they might decide to buy less tomato sauce, thus using less of it. Or, they may decide to eat out less often and buy more tomato sauce because they are eating in more. Or they might switch from a premium tomato sauce to private label tomato sauce. There is no single pattern that affects all brands and all services.
People may also switch from buying their tomato sauce from their neighborhood store to a discount store. Or, they may start buying more of their shopping online, or join discount schemes and clubs.
From a brand’s point of view, the key concerns are churn and lifetime value. Somebody buying less of your product or service for a year, because they are short of money, is not a long-term problem. Somebody switching from you to another product, service or channel is a much bigger issue. This sets different players in the market against each other. The maker of the tomato sauce would prefer its customers to switch channels or to buy less sauce. The retailer would prefer the buyer to stick with the same retailer but switch brand of tomato sauce.
Increased prices impact more people than reduced spending power. In an economy, even in inflationary times, only some people feel the heat of reduced spending power. If your income is index-linked to prices, or if you were not spending all your income anyway, then reduced spending power is not a big issue. However, increased prices potentially impact everybody.
In the first few years of inflation (following 40 years of low inflation), people feel aggrieved by increases in prices. When prices go up, people often re-evaluate whether they really want to buy that product or service. If they realize they don’t really value it, they may stop buying it, even if they can readily afford it. Lots of services have recently put in their first price rise for years, it will be interesting to see how much churn this creates.
The need for businesses to cut costs raises the prospect of the product or service being reduced in quality. Typical ways of cutting costs include: cutting staffing levels, cutting marketing spend, reducing research and new product development, reducing the coverage (for example, shorter opening hours), and making the product or service less good (for example, making the chocolate bar smaller, the insurance policy less comprehensive, or increasing queuing time to pay or enter).
How can you lead the customer experience?
The key to improving customer experience is to move from experience managers to experience leaders. In the context of inflation, this means creating experiences that optimize options in inflationary times.
Ten key steps you can take are:
- Be proactive. As a brand, you do not want to be reacting to changes in costs, demand and markets, you want to lead on as many things as possible. Tell customers what you are doing to help them, don’t be caught having to react.
- Be transparent. If you have to put prices up, be honest about it, never surprise customers, and ensure that your teams, especially your customer-facing teams, have been briefed properly.
- Be honest. If the price of milk has gone up 10%, but milk only accounts for 1% of your costs, don’t put your prices up 10% and blame it on the milk.
- Be customer-focused when cost-cutting. If you cut costs, work with your customers to minimize the downside for them. Find out which options they don’t use/value, find out which options they are most willing to give up, and investigate new (lower cost) options such as Netflix’s ‘Basic with Ads’.
- Try to avoid leaving money on the table. If you reduce your service by 10% and thereby avoid a 10% price increase, you are likely to leave money on the table. There will be customers who would happily have paid the 10% more to get the full service. Create options that allow the people who want to pay more (so that they get more) to do so.
- Focus on lifetime value and reducing churn. What options can you offer that will avoid somebody switching to another supplier or ceasing to use your product or service entirely? If you offer an online service, is there a lower tier that people can switch to? If people have a mobile phone contract with you, are there changes to their plan which will not impact their utility, but which will save them money?
- Listen to your customers. There are more smart people outside your organization than inside it, so it makes sense to leverage the wisdom of the crowd. In your CX surveys, ask people if there are things you could tweak to reduce costs and preserve value?
- Review your CX program, are there alternative providers that could simultaneously reduce your costs and put you on a pathway that will allow you to avoid CX stagnation? Platforms are going through rapid changes, new players have added new integrations and the future is closer than you think.
- Add value if you can. If you are a restaurant, the cost of the food is a relatively small proportion of the price (compared with staff, rent, energy and taxes), so perhaps make the meals larger or promote taking a portion of the meal home.
- Focus on your people. It is your people who deliver the experience, it is your people who take all the grief when you increase prices or reduce the service. Make sure that you have a great EX (employee experience) program. Work out how to help your staff get through these inflationary times.
My main message from the past?
Inflation is here, and for most of you, it will be a new experience. Things are going to be much less stable for at least a year, maybe longer. However, once you get the swing of it, you can be just as successful in inflationary times as in any other.
If you are number 2, 3, or even 23 in your market, the instability caused by inflation could be your opportunity to move to number 1. Be proactive, listen to customers, and don’t operate with an out-of-date mindset.