Is a recession looming in 2023?

As we look towards the year 2023 it becomes harder and harder to ignore the current economic climate and the potential impact on consumer behavior. With a recession looming, retailers must be proactive in understanding their customers, discover what drives them and find innovative ways to keep them coming back time and time again.

A recent study from the Boston Consulting Group found that 71% of respondents believe their country is already in recession, with respondents reporting that they are spending more and saving less than they were six months ago. This increased spending is expected to continue, with the rising costs of essential items being a key factor.

With an increased cost of living comes a shift in the consumer behavior. With customers placing greater importance on promotions and deals and making fewer trips to stores in an effort to save on transportation costs. Additionally, consumers are increasingly seeking out alternative ways to save money, such as through online shopping and cooking at home.

Marketing in a recession – who is your customer?

One thing we have learned from previous recessions is that no two downturns are exactly alike. This makes it even more challenging for retailers as it is impossible to tell what the landscape will look like in 12 months’ time. With customer behavior changing, retailers must also change and adapt to ensure they can better navigate these uncharted waters.

In 2009 The Harvard Business Review published a paper on how to market in a downturn. The paper analyzed marketing successes and failures and identified a number of patterns in both the behavior of companies and customers, suggesting customers can be broadly split into four categories based on their spending types:

They are the most vulnerable and hardest hit by economic changes, tending to cut all types of spending through reducing, eliminating, or substituting purchases.

They are optimistic about the long term but concerned about maintaining their current standard of living. They will economize across all areas, though less aggressively. This group represents the majority of the population and as economic uncertainty continues more and more tend to migrate to the slam-on-the-brakes group.

They are secure in their ability to ride out economic changes and do not alter their spending significantly, though they may be more conscious of their choices.

They live in the present, carrying on as normal and simply extending the timeline for major purchases. This group is typically urban, young renters and their behavior is unlikely to change unless their employment status is impacted.

Regardless of which group customers fall into, they prioritize their consumption by sorting products and services into four categories:

Items that are necessary for survival or important to well-being

Indulgences whose immediate purchase is considered justifiable

Items that are needed or desired, but the purchase can be held off

Unnecessary or unjustifiable expenses

Tailoring your tactics

To keep up with these rapidly changing customer behaviors – and perhaps even influence those changes – retailers need to take advantage of deep customer insights. As a retailer, it is crucial to understand which category your customers fall into and how they are prioritizing their spending, reallocating funds, switching brands and redefining value in order to better assess opportunities.

Even though the reason behind these changes to behavior is driven by the recession, and thus is transient, knowing your customers of today is necessary in order to get to know and satisfy their needs in the coming post-crisis period.

Listening to and analyzing the customer data every time they visit can help retailers gain insights into customer behavior and identify changes, leading to improved customer experiences and increased loyalty. AI models can be used to analyze this data and identify patterns and trends. A customer-centric culture and mindset is also important for consistently putting the needs of customers first and gathering feedback.

The next phase of AI in retail is to use it to better understand the individual customer and their relationship with the retailer, in order to create a more personalized and engaging shopping experience. This involves analyzing customer data to gain insights into the customer’s needs, preferences, and behaviors, and using this information to tailor the customer experience and motivate customer loyalty.

This involves identifying “peak moments” in the customer journey that have a disproportionate impact and tend to be remembered most, in order to create a strong, satisfying bond with each customer. By focusing on these peak moments and using AI to better understand and serve individual customers, retailers can create more loyal and profitable relationships with their customers.

Imagine a fuel retailer that has a loyalty program in which customers earn points for every purchase they make. The retailer could use AI to analyze customer data and identify patterns in purchasing behavior;  such as the types of products that are most popular among different customer segments or the times of day when customer traffic is highest. This information could be used to tailor the loyalty program and offer personalized rewards and incentives to customers. For example, the retailer might offer additional points or discounts on certain products that are popular among a particular customer segment, or extend the hours of the loyalty program to better align with peak customer traffic times. By using AI to better understand and serve individual customers, the retailer could create a more personalized and engaging shopping experience that drives customer loyalty and retention.

In summary, it is important for retailers to understand their customers, how they categorize and which products are most important to them in order to adapt their marketing strategies and create a more personalized and engaging experience. By leveraging AI and customer data to gain insights into customer behavior and preferences, retailers can identify ”peak moments” in the customer journey to create more loyal and profitable relationships. In a recession, it is especially important for retailers to be proactive and adaptable in the face of changing consumer behavior in economic uncertainty. By understanding their customers and finding innovative ways to meet their needs, retailers can weather the storm and come out on top.

FACT BOX

Here are some key points that retailers should consider in order to adapt to changing consumer behavior and economic conditions:

• Offer promotions and deals: In times of economic uncertainty, customers are more likely to be on the lookout for promotions and deals. Retailers can use discounts, coupons, and loyalty programs to encourage customers to continue shopping with them.

 

• Strengthen their online presence: With more customers turning to online shopping to save on transportation costs, it is important for retailers to have a strong online presence. This includes features such as easy navigation, clear product descriptions, and multiple payment options.

 

• Align products and services with the economic climate: Retailers can consider offering budget-friendly options or products that can be used at home, such as cooking ingredients or home office supplies.

 

• Understand and adapt to customer behavior: Retailers should analyze customer data to gain insights into their needs, preferences, and behaviors, and use this information to tailor the customer experience and motivate customer loyalty.

 

• Communicate with customers: Retailers should be transparent and communicate with their customers about any changes or challenges they are facing as a result of the economic downturn. This can help to build trust and establish a sense of shared understanding and solidarity.

 

• Identify and focus on peak moments: Retailers should identify the points in the customer journey that have a disproportionate impact and tend to be remembered most and focus on creating a strong, satisfying bond with each customer.