Danger: Strong Economy Ahead

Danger: Strong Economy Ahead
Tags: Consumer Behavior, Customer Experience, Marketing
April 16, 2011

Is the recovering economy a blessing, or a potential minefield for retailers?

Most business owners are breathing a sigh of relief; they're emerging alive and well from one of the most devastating economies in seven decades. The danger is past. Or is it?

My experience is that the most dangerous time for any business is during boom periods. These are the times when employment is high, wages are up and people have incredible amounts of discretionary income. Life is good.

How can this be dangerous? After all, you're making lots of money more easily than you could ever have imagined. So where's the danger?

The danger lies in the fact that the additional discretionary income causes buyers to spend money on things that only have a moderate interest to them. These are nice-to-have things that become the first budget cuts people make when cash gets tight. Here's what happens.

You're a business owner. You've just come out of a tough economy extremely grateful to those customers who stayed with you during the difficult times. You see a trend developing. There are people expressing an interest in buying your offerings who weren't interested before. As you look at these buyers you see a huge market for your products and services.

You pursue this market only to discover that, while these 'buyers' are interested, they're not willing to pay full price to get what you offer. You do a little math and realize that by offering a discount you could garner a significant enough percentage of the market to more than offset the discount.

Your plan works. You discount your prices and generate a truckload of revenues. Your business is growing. You're hiring new people, adding production capacity and warehouse space to handle the additional volume. Over cocktails, you regale others (especially your competitors) with your company's success. Life is good...

...until the next shiny object comes along and these new buyers' interests shift or the economy slows sufficiently to put their discretionary income at risk. Suddenly you find buyers shifting away from you. Sales, profits and cash flow are all declining. You begin to worry about making payroll. You've got to do something to stem this tide. Then you remember that you were able to attract these buyers by offering a lower price, maybe this will help retain them as customers. So you lower your price.

Much to your dismay your customers are still leaving in droves. How can this be? What do these people want?

The reality is that they want, and buy, what they've always wanted, and bought: the things that they value most. Buyers find the money for the things that are truly important to them. Buyers whose greatest joy is travel will forego eating out to save enough money to travel. Those who enjoy driving a new car every few years will cut back on redecorating their home to afford that new car. All buyers return to the things that they value most when the economy tightens.

Unfortunately, that leaves you with excess capacity — all those people as well as the production and warehouse capacity that you added. To make matters worse you're trying to cover all of these costs on twice-depleted margins. Remember you lowered your price to get the business, then you discounted again to try to retain the business. Of course you couldn't just discount to these buyers, you had to offer the same discount to those wonderful customers who stayed with you through the tough times.

What's the moral of this story? It's counter-intuitive but staying focused on those buyers, that market that stayed with you during the difficult economy, will help you avoid:

Investing marketing dollars to attract buyers with only a modest interest in your offerings.
Discounting to get their business.
Increasing capacity and infrastructure costs to accommodate this 'new market.'
Discounting in a futile attempt to retain these buyers.

If you want to enjoy great success in good times and bad:

Stay focused on those customers who stayed with you during the downturn.
Invest your marketing dollars to gain more buyers like them.
Find new ways to serve these customers/prospects.
Help them position themselves to thrive in an economic downturn.
Raise your prices during good times and bad, albeit more modestly in tough times.

Finally, smile as you recall those competitors who regaled you with their phenomenal growth rates during the 'good times.' They're the same ones who are now discounting heavily in failed attempts to retain customers. That's on top of the money they're spending to rid themselves of excess capacity.

Avoid the pitfalls of a strong economy and your business will thrive in difficult economies as well.