It is vital for any business, particularly DTCs with narrow profit margins, to comprehend how to adjust to an economic downturn and create marketing plans that account for shifts in consumer behavior during such periods. The years after the pandemic have presented an ideal scenario for a recession, with significant inflation reaching levels not witnessed since the 1980s, interest rates at historic highs, making it more difficult to obtain money, disruptions in supply chains due to China's delayed response to Covid-19, and numerous other uncertainties.
Bloomberg estimates that a recession will most likely mark 2023, warning businesses and consumers to prepare for an economic downturn. Other expert voices in the industry are more reserved towards the year of the next economic downturn: "I can predict with 100% accuracy that the US economy will face another recession; I just can't predict when." —Danny Bachman, Deloitte's US Economic Forecaster.
The scale of the probable upcoming recession is unknown. Still, DTCs can undoubtedly learn from the past economic downturn associated with the 2008 crisis and asses the best strategies to survive the forthcoming recession. In this article, we take a closer look at past economic downturns and outline marketing strategies and learnings adapted for changed consumer behaviors. Understanding these proven measures to cope with complex economic realities is critical for all DTCs to navigate the forthcoming downturn successfully.
How do recessions affect consumers and DTCs? Threats and opportunities
A recessionary period is usually marked by lower consumer confidence and less spending. In uncertain times, consumers either refrain from spending or simply can't afford the goods and services they used to acquire. This phenomenon leads to DTCs and e-commerce companies facing challenges such as decreased sales and revenue. Acquiring new customers or retaining existing ones is also a struggle, especially for non-established brands. It is also known that businesses may face a more challenging operating environment during a recession, including higher costs and reduced access to capital.
Depending on the nature of their products or services, their business model, and the recession's severity, DTCs are affected just like any other business. But, adapting to changing market conditions and offering high value to consumers may be the best response for businesses, including DTC brands.
By looking at the graphic below depicting the change in discretionary income during the past two recessions, businesses can easily understand how suddenly the type of products they sell and the messaging around their marketing matters more than during booming economic times.
DTCs can adapt to evolving market conditions, such as reduced spending on non-essential items, by presenting distinctive and appealing value propositions that set them apart from their competitors. Moreover, they can leverage various marketing channels to attract new customers. During an economic downturn, e-commerce companies that provide essential or reasonably-priced luxury products may also thrive, as consumers tend to prioritize their spending on necessary goods.
Another opportunity for direct-to-consumer companies might represent the competition among established brands, leading to more consumers looking for affordable options represented by DTCs. Also, as traditional brick-and-mortar stores struggle, e-commerce and digital channels may become attractive alternatives for consumers, which could benefit DTCs. A recent example is the transition of a high percentage of the worldwide population to online shopping, even if only for a limited period during the curfews imposed by Covid-19.
The landscape of the past recession
It's no surprise that in January 2009, the Conference Board's U.S. Consumer Confidence Index sank to the lowest level since tracking started in 1967, as the 2008 recession was the worst economic downturn since the Great Depression of the 1930s.
The 2008 recession had a global impact and is considered to be the first truly global recession since World War II. With a more dependable global economy, few predict future economic downturns geographically unrelated. As the supply chains have not diversified, a coming recession will likely highlight the current dependencies. Thus brands operating on any continent can be affected.
Economic downturns usually result in peak unemployment rates, as shown in October 2009, when 8.7 million jobs were lost between December 2007 and June 2009. Understanding the dynamics of previous recessions can lead to better preparation, as brands can pivot to less competitive industries or products to generate positive financial returns.
According to the Federal Reserve, the 2008 recession caused a contraction of the US economy by 4.3%, the most significant contraction since World War II. This has led to many bankruptcies, and brands today can expect similar behavior, with consumers focusing on necessities instead of luxuries or inessential products.
Expecting everything to return to normal as fast as the world economy recovers after the Covid-19 pandemic might not be realistic. The recovery from the 2008 recession was slow and uneven, with some groups and regions getting better more quickly than others. Some countries needed even 6-7 years to regain their economic stability.
By understanding these factors, DTC and e-commerce brands can better prepare for similar consumer behavior during future economic downturns by developing a strengthened supply chain strategy, adapting product offerings, and maintaining solid financials with lean costs.
How consumers' behavior changes during a recession
Consumers change their spending habits, preferences, and purchasing decisions during a recession. These changes can be best described through behavioral segmentation, a term introduced by researchers and experts in the field of marketing, economics, and consumer behavior. The consumers' behavioral segmentation is derived after Martin Fishbein and Icek Ajzen's theory of reasoned action, introduced in 1967 to explain the relationship between attitudes and behaviors within human action. Customer behavioral segmentation has become a buzzword in discussions about marketing strategies to navigate recessions, thanks to the incorporation of findings and research from social psychology, persuasion models, and attitude theories, which have improved and enhanced this approach.
John A. Quelch, a Business Administration Emeritus at Harvard Business, emphasizes the importance of switching from demographic or lifestyle segmentation to psychological segmentation. This means marketers should focus on consumers' emotional responses to the economic environment and evolving consumption patterns.
The Harward professor identifies four groups in which customers can be grouped beyond the classical segmentations mentioned above:
- slam-on-the-brakes segment, which feels the hardest hit, reduces all types of spending. Usually, a low-income segment, anxious higher-income consumers, can also be included here.
- pained-but-patient consumers, who constitute the largest segment, also economize in each area, though less aggressively. Depending on the news, they might migrate into the slam-on-the-brakes segment.
- comfortably well-off individuals consume at near-prerecession levels but become a little more selective about their purchases. Usually, only 5% of the population individuals that feel confident about their future finances.
- live-for-today consumers are typically urban and younger, responding to the recession mainly by extending their timetables for making major purchases. They are more likely to rent than to own and spend on experiences rather than stuff (with the exception of consumer electronics).
In his Harvard Business Review article, John A. Quelch supports the idea that all groups prioritize consumption by sorting products and services into the following categories:
- Essentials are necessary for survival or perceived as central to well-being.
- Treats are indulgences whose immediate purchase is considered justifiable.
- Postponables are needed or desired items whose purchase can be reasonably put off.
- Expendables are perceived as unnecessary or unjustifiable.
This classification of consumer segments and goods clarifies the needed marketing adjustments to thrive during a recession. Studying the behavior of consumer segments during recessions highlighted trends such as consumers prioritizing necessities (food, personal care, and home care products), over luxury items. Additionally, buyers became more price-conscious and more likely to seek deals and discounts. Thus, as consumers' behavior changes, so must DTCs adapt their marketing.
Tailored marketing for new consumer segments
Understanding past economic downturns and how consumer behavior changes during such times can be crucial for DTCs to navigate the forthcoming recession successfully. As consumers tend to cut back on spending, DTCs offering necessities or affordable luxuries may perform better and differentiate themselves from competitors by providing unique value propositions and utilizing diversified marketing channels.
Incorporating the consumer behavioral segments in a brand's marketing strategy means crafting attentive messaging addressing the real pain points of customers, especially the ones affected by the new economic realities. Also, adapting price strategies and communication to respond to the pressing needs and fears of the new consumer segments represents a go-to strategy for DTCs.
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If you want to learn more about proven marketing strategies for DTCs to navigate the upcoming economic downturn, read part two of our series Marketing in a recession.