Many changes in product sales can be explained by shifts in consumer purchasing power. Predicting this kind of fluctuation isn’t always easy — that’s why it’s important to learn how to respond to each one.
In this post, you’ll learn a bit about how the consumer deals with purchasing power, as well as which factors drive these variations and how to handle them. Ready? Let’s dive in!
How do consumers deal with purchasing power?
The first thing you need to know about purchasing power is that it’s rarely just about changes in the economy. For example, let’s say your customer earns a specific salary to perform a certain job.
A factor like inflation can reduce the customer’s purchasing power. But that’s not a hard-and-fast rule. If the customer’s income rises at a rate similar to the increase in prices, their purchasing power can stay the same.
And that’s not all — even when the economy is doing well, if the customer’s income drops, their purchasing power tends to fall.
What factors influence purchasing power?
Many things can reduce or increase a customer’s purchasing power. Below, we list some you should consider. Check them out!
Inflation and the income effect
Broadly speaking, inflation is the general, cumulative, and continuous rise in prices. It’s usually measured by specific indicators, such as Brazil’s Extended National Consumer Price Index (IPCA).
So what does inflation tell us? Imagine you have an income of 2,500 reais a month and your monthly expenses average 2,100. If inflation turns that 2,100 into 2,200, you’ve lost 100 reais of purchasing power.
This has some side effects on the customer’s wallet, from higher interest rates and less profitable investments to difficulty getting bank credit. This is called the “income effect,” and it refers to the indirect change in income resulting from price changes.
Informal work and unemployment
Unemployment and informal work are constant factors in shifting purchasing power. That’s because income growth slows down — and, in some cases, wages drop considerably.
Formal jobs, on the other hand, tend to boost consumption, since the risk of being laid off is lower. What does that mean? In practice, the purchasing power of people with formal employment contracts (under Brazil’s CLT labor regime) increases considerably.
Private investment
Private investments are those made by companies with the goal of expanding their operations and generating financial returns. In this case, they’re one of the factors responsible for increasing purchasing power.
Much of the success of these investments depends on interest rates and on how promising they are likely to be — in other words, how favorable market conditions are.
Trade balance
This is a term you’ve probably heard on the news. So what does it mean? The answer is simple. Broadly speaking, the trade balance refers to the difference between what comes into and what goes out of the country.
You know those investment rankings that show up in the papers, giving a country a certain rating? Well, they offer clues about the state of the trade balance.
How to deal with variations in purchasing power?
Many variations in purchasing power are unpredictable and uncontrollable. However, there are strategies you can adopt to deal with them. Here are a few:
Pricing strategies
Remember when we said that inflation affects product prices — and, as a result, purchasing power? That means one of the most important factors in how it changes is price itself.
That’s why it’s crucial to use sound pricing strategies when dealing with these variations. Make sure to carefully weigh factors such as persona, competition, supply, demand, brand value, socioeconomic indicators, and so on.
Promotions
If your audience’s purchasing power has dropped, promotions can help increase your conversion rate — especially if the prices match their current financial capacity.
That’s why promotions should be realistic and strategically designed. It’s important to build them as if they were a standalone marketing campaign. What does that mean?
Imagine you decide to set a new price for product “X.” In that case, you don’t just consider the final price. Other elements, such as target audience, goal setting, value demonstration, deadlines, and the use of scarcity triggers, should also be taken into account.
Flexible marketing plans
A rigid marketing plan that doesn’t adapt to the market usually leaves companies unprepared to deal with these variations. The key to a more flexible campaign is communicating with your customers.
If you don’t talk to your customers, you’ll hardly know what’s going on with their wallets.
After-sales
The only way to convince a customer to stick with your company during tough times is by building a lasting relationship. That’s how you earn their trust when purchasing power drops.
After-sales service reinforces your relationship with the customer once the purchase has been made. This way, you ensure your audience comes back to buy from you, since it makes searching for alternatives (which aren’t necessarily as reliable) not worth the effort.
As you’ve seen, understanding variations in consumer purchasing power is an excellent way to deal with periods of low demand and use them to your company’s advantage.
Try to stay well informed and keep up with the news to know whether the economy is holding steady. There are countless publications specializing in market trends — following them regularly is important.
What about you? Want to learn more about how to boost your audience’s spending? Then read our post about the guide shop!
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