Inflation: Should you wait or take action as a marketer?

Prices are skyrocketing. According to Eurostat, Belgium is experiencing an inflation rate of 9.3%. It is also expected that this exceptionally high level will persist for a while. Some surveyed retail experts predict that prices will continue to rise in 2023. Should Belgian marketers be concerned about this? In Belgium, we have a system where wages and pensions automatically increase when the reference index is surpassed. But doesn’t this just create a new price spiral? And aren’t energy costs—5 to 8% of the household budget—a significant driver of the current inflation? Yet, these additional costs are not included in the health index.

It’s clear that the disposable income of our customers will be significantly lower in the coming months than what we’ve been accustomed to. A Google Trends analysis shows that this is already on the minds of Belgians. The search terms "goedkoper" (cheaper), "moins cher" (cheaper), and "besparen" (save) reached their highest index in the past five years in the first quarter of 2022. There’s no doubt that consumers and shoppers will adjust their behavior. That’s why we’re happy to provide you with practical tips on how marketers and entrepreneurs can navigate this challenge—something our generation has rarely faced—and come out as winners.

The easiest solution you read about to be less dependent on prices is "brand equity. Make sure families have a link to your brand that transcends the rational and they will continue to choose you. You just have to make sure your brand is "sticky. Of course, we believe in the strategic value of brands, but you don't build a brand overnight. That's why we prefer to give some tools that you can integrate into your plans practically and in the short term.

Of course, the impact of a price increase on your sales does not depend solely on disposable income. The competitive playing field also has an impact. A competitor may become more attractive when you raise your prices. Other than reacting by cutting your margin yourself, there's not much you can do to change this. Our advice: keep an extra close eye on this when prices rise. That way you can integrate it into your marketing and communication plans.

Not everyone responds to inflation in the same way. Families who have to turn over every euro twice will have to make choices. There are also very price-conscious buyers. A target group that views and evaluates a price increase rationally. Another variable is the dispensability or indispensability of the product. A young mom will not hesitate for a second to buy the right product for her baby. A couple of empty-nesters, on the other hand, might consider putting off that purchase of a new TV for a while.

Four in 10 Belgians would not be able to save at the end of the month, according to a Statbel survey. So when prices rise more than wages, it automatically means spending less. This can be done by cutting back, postponing or opting for alternatives. This target group is relatively easy to identify based on sociodemographic data. Yet there are also two target groups that are more difficult to identify, but which also act when prices rise. On the one hand, there are the price-conscious buyers. They are well aware of the increase and will decide for themselves whether they think it is fair or not. On the other hand, there is a target group that is anxious and prepares to maintain their standard of living should things get even worse.

Are these three target groups in your customer base? Then you will feel it in your sales. After all, they can or will only spend less. It is your struggle to keep them loyal to you, so that they remain loyal to you even later. You actually have to reward them despite them spending less. That can range from teaching them how to save in your assortment by making different choices (fresh vegetables are cheaper than prepackaged vegetables, for example) or changing your incentive program, rewarding frequency instead of volume, for example.

Do you sell luxury products and have a customer base that is armed against inflation or lives by a "carpe diem" mentality? Then remember that your competitors are not standing still. Defend your relationship with them by making them feel that the cost, especially figuratively, of going to a competitor is high: make it personal.

It’s important to accurately assess how essential your store, assortment, or product actually is for your customers and target audience. To survive, people need to eat, stay warm, and dress. Health will also be a priority in a household's budget allocation during times of inflation. With a decline in disposable income, there may be a change in purchasing behavior, such as a shift to a cheaper alternative or a reduction in purchase frequency, but a transaction will certainly still take place. A shopping journey will still be started and completed. The likelihood of loyal customers coming to your store or webshop remains high. Show empathy in your interactions, and customers will reward you with even more loyalty, both now and in the future.

For products that are not essential, this is not always the case. There is not always direct contact with your brand during the shopping journey. You may even be unaware, as your target audience is still in the consideration phase (the dreaming phase) of potentially purchasing a product. To avoid missing out on these sales during times of inflation, it’s especially important to communicate the value you offer and the solutions you can provide outside of the store environment.

Does all this mean that you should expect a less favorable result? In our (qualitative) survey, more than half were pessimistic about the results of 2022, but 80% were optimistic about the next year. However, even in the short term, you can still win. You will need to compensate for the loss of revenue from loyal customers by attracting switchers who buy from your competitors. You won’t necessarily achieve this by highlighting the products you excel at but rather by focusing on those where you might not be as strong. These are the products they are currently purchasing from your competitors. If you succeed in this, you will win the battle for the ‘share of wallet.’ This will also sustainably position you to increase your market share in the future.

There is a paradoxical effect that in difficult economic periods certain (cheap) luxury categories do just fine. Indeed, people sometimes like to make choices that relieve pain for a while. For example, there is the need to pamper oneself. This is possible when the buyer can justify it. It is then not about how cheap something is, but rather about whether he can afford it. When the dot-com bubble burst in the early 2000s, sales of lipstick soared. The rationale to explain this was that women were compensating for their reduced purchase of clothes or shoes with another, cheaper luxury product. This was also observed in other categories. After the banking crisis, the French licked more "single portion" ice creams, while in Germany they feasted more on alcohol-filled chocolate. So it can be smart to respond to this need in your stores or communications and encourage (impulse) purchases.