The question of ‘why did it take so long for inflation to impact consumer spending?’ has been puzzling both the Bank of England and Government Advisors for the past year or so; and we think we know one of the largest contributing factors: Brand Loyalty and Customer Advocacy.
We’re certainly not economists but – like the rest of the world – we anticipated some fallout from Brexit, the Covid-19 pandemic, and Russia’s invasion of Ukraine. And as anticipated, it came in the form of the Bank of England consistently increasing the base inflation rate between December 2021 and August 2023 – a whopping 5% increase over 20 months!
Source: Bank of England Database
Although it was predicted that inflation would rear its ugly head, not many people expected it to take quite such a drastic increase to curb spending.
In this article, we’re focusing on consumer spending and our theory on why it took so long to see a real impact from inflation hitting people’s wallets and purses.
This is what brand loyalty is all about
While the economic landscape has been shifting like sand under our feet, consumer spending remained surprisingly resilient for a considerable period. This resilience, we believe, is largely attributed to the power of brand loyalty.
Put simply, brand loyalty appeals to two of our core human instincts:
- Risk Aversion
- Confirmation Bias
Risk Aversion
When prices are rising, it is not the time to flutter your hard-earned pennies and pounds on the gamble of somewhere you’ve never been before. This awareness of risk aversion has been fuelling consumer loyalty schemes for decades, but it’s always more prevalent during an economic downturn.
For example, take Britain’s “favourite” supermarket: Tesco. On a purely logical basis, it would have made sense for every shopper in Britain to take their custom to Aldi during the cost-of-living crisis – in doing so saving each household an average of £880 per year – however, Tesco remains unwavering as the king of the UK grocery monarchy.
Why?
We trust Tesco. Not just with our cash, but also with our data. The new Clubcard prices strategy (although scrutinised quite heavily) has resulted in a staggering 20 million plus households across Britain now being signed up to the scheme.
“Against a backdrop of profound change, Tesco has many unique advantages. Our ability to reward loyalty through Clubcard enhances our relationship with customers.” – Ken Murphy, Tesco CEO.
Confirmation Bias and Brand Perception
A twist to this tale though is how brand perception also affects consumer spending.
In May 2023 we (I’m using the royal we) crowned a new King, and it appears the nation thought there was only one supermarket that embodied such a celebration: Waitrose.
Normally viewed as the grocery choice for those that can afford the finer things in life, during the coronation, Waitrose enjoyed a 4.8 per cent hike in sales over the twelve weeks, the highest rate of growth the retailer has achieved since early 2021.
This is a fantastic example of where confirmation bias and brand perception overlap.
Confirmation bias is our inclination to favour and recall information that supports our existing beliefs, while ignoring or forgetting data that contradicts them.
So for a hypothetical example, you might have not been back to Waitrose after buying a sub-par potato dauphinoise in March, but you’re willing to put that to one-side, safe in the knowledge that it’s the only supermarket with the quality of goods to really deliver on a buffet fit for royalty in May.
In short: If you believe strongly in the brand, you’ll ignore their mistakes.
The power of a strong brand
“If people believe they share values with a company, they will stay loyal to the brand.” – Howard Schultz, former CEO of Starbucks
So let’s talk about the difference a strong brand can make during tougher times. Do you remember hoverboards? – The horizontal things with two wheels that were all the rage in 2015-17:
Once upon a time, these were flying off shelves of toy stores and on every kid’s Christmas list. However, one slight snag… quite a few kept catching fire while charging. So naturally, everyone stopped buying them.
Makes sense.
Now what if I told you, the same thing happened with Smartphones?
In 2016-17 hundreds of Samsung Note 7 smartphones started exploding, leaving consumers hot-headed – and presumably with even hotter hands.
However, here we are in January 2024 and Samsung has just taken over Apple as the global largest seller of smartphones. So evidently, not many people stopped buying from them.
The difference = brand perception.
Hoverboards, despite their popularity, were (and continue to be) produced by numerous manufacturers globally, which has resulted in a race-to-the-bottom price war.
Unfortunately, this meant that small profit margins left no room for a high-quality brand to enter the market and invest in making the technology better, more reliable, or even less-flammable.
This resulted in consumers taking their gripes up with the product, rather than the manufacturer, leading to declining sales ever since 2019.
However, in Samsung’s case, they’d built such a strong reputation as a trusted technology manufacturer, not only were they able to conduct proper product testing, recall thousands of units and publish numerous press releases to calm disgruntled consumers; they were also able to reward those customers affected with exclusive gifts and go on to increase smartphone sales year-on-year to date.
This is a rather extreme example, but it demonstrates the flexibility and hardiness a strong brand can provide.
Did you know? – Since starting as a Nottingham herbalist shop in the 1800s, Boots has grown to be the UK’s top health and beauty retailer and its most trusted brand, with a net trust score of 60.14. Like in France, Germany, and Italy, Brits view trust as crucial in healthcare.
5 Key steps to building a brand your customers trust
We’ve covered the ‘why’, so now it’s time to think about the ‘how’.
“The key is no matter what story you tell, make your buyer the hero.” – Chris Brogan
To have a brand that acts as the keystone of your relationship with customers, supporting you in tougher economic times (such as a period of inflation), we’ve put together 5 key considerations that are vital to get right.
1. Communicate, Engage, and Listen:
Why It’s Important: Effective communication is the cornerstone of any strong relationship. By engaging with and listening to your customers, you demonstrate that you value their input and are committed to meeting their needs. This fosters a deeper connection and builds trust.
Actionable Steps:
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- Regularly update customers about business activities through your website and social media channels.
- Create accessible feedback channels, either through internal methods such as email, customer service systems, and website product reviews; or via 3rd party platforms like an active Google Business Profile or Trustpilot.
- Respond promptly and thoughtfully to customer interactions – both good and bad.
2. Reward Loyalty:
Why It’s Important: Recognising and rewarding loyalty shows customers that their continued patronage is appreciated. This not only strengthens existing relationships but also encourages repeat business and positive word-of-mouth referrals.
Actionable Steps:
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- Introduce, and actively promote, a loyalty programme with meaningful rewards, extra points if your reward scheme is ongoing rather than a one-off discount.
- Host exclusive events for customers and marketing sign-ups. This can be a great way to engage with various customers whilst they’re at different points of the buying journey.
- The very best companies are now offering personalised discounts and recommendations based on previous interactions.
3. Encourage Advocacy:
Why It’s Important: Customer advocacy extends your brand’s reach and credibility. When customers share their positive experiences, it acts as a powerful endorsement, attracting new customers and reinforcing the loyalty of existing ones.
If you don’t do this already, start today by making someone liking or commenting on your social posts feel like they’re a superstar for supporting your brand.
Actionable Steps:
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- Promote user-generated content on your platforms. This includes testimonials, customer photography, and unique use cases.
- Use each social platform as a different way of communicating with your audience. Use posts to start conversations, rather than always trying to drive followers back to a website or conversion page.
4. Deliver the Right Quality and Service:
Why It’s Important: Delivering consistent levels of quality products and services is fundamental to maintaining customer trust and satisfaction. It sets the standard for what customers can expect from your brand. We’re not suggesting it must always be high-quality, but it should fit your brand – for example, you don’t expect a sommelier to offer you a scent test of your Sprite at McDonalds.
Actionable Steps:
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- Ensure any staff are trained in delivering customer service in a way that aligns with your brand values.
- Provide comprehensive customer service training.
- Offer support to your customers at every stage of their buying journey. This includes making information easy to find during research and supplying comprehensive after-sales support.
5. Price for Success:
Why It’s Important: Correct pricing is not just about increasing prices. It’s about implementing a strategy that increases profits without damaging the business or losing clients. This delicate balance is essential for long-term business sustainability.
Actionable Steps:
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- Conduct market research to understand pricing dynamics and regularly review your pricing. This includes analysing competitor pricing and ensuring your offering is value-based rather than just price-focused.
- Ensure your branding aligns with your price point. This will help customers to get a feel for your brand, understand your ethos, and ultimately begin a two-way relationship.
- Partner with pricing strategy experts like Pricemaker for tailored advice and guidance that will help increase profits while also ensuring customer retention.
By focusing on these key areas, you can build a brand that resonates with customers, earning their trust and loyalty even in challenging economic times.
The delayed impact of inflation on consumer spending is a testament to the strength of brand loyalty and customer advocacy.
In these challenging economic times, nurturing these aspects of your business is more crucial than ever. It’s about building and maintaining relationships, being transparent, and showing appreciation.
If you’d like to futureproof your brand and discuss how you could drive more sales or enquiries in today’s market, get in touch today for a no-obligation chat about what you’re looking to achieve and how Tomango can support you.