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If the Economy Sours, What Will Your Customers Do?

Dec 7, 2007
Recent news coming from Wall Street won't exactly fill your stockings with Holiday cheer. In fact, it may make you think about tucking a bit of your discretionary cash under the mattress for the proverbial rainy day. If the economy does sour, what will your customers do? Will they continue to spend as they always have, or will they begin to pare back spending?

Typically, the U.S. consumer is a hearty bunch. Despite previous economic setbacks, consumer spending has kept the economy moving forward; the result has been six consecutive years of U.S. GDP growth, including a robust 4.9 percent growth rate in the 3rd quarter of 2007 according to the U.S. Department of Commerce. But the latest round of economic signs should prompt all businesses to think twice about where the economy might be headed.

The economy may very well weather the latest storm of rising energy prices, falling home values, and tightening credit markets and continue its long running growth trend. If so, then businesses should simply ignore all of the shouting and arm waving about a potential recession. But what if consumer spending doesn't bail out the economy this time?

Recent economic news won't do much to comfort the U.S. consumer psyche:

Consumer Confidence Drops: The November 2007 Consumer Confidence Index as reported by The Conference Board fell to 87.3, continuing a downward slide since the feel-good ratings of 105.6 posted in August.

Property Values to Decline: The U.S. Conference of Mayors report that property values could decline as much as $1.2 Trillion across the U.S. in 2008.

Personal Income Growth is Slowing: Personal income grew only 0.2 percent annually in October, down from 0.4 percent in September according to a report published on CNBC.

For more news on the US economy, see the article 'US Economy Sees More Signs of Weakness' posted on CNBC's web site.

Perhaps nobody can truly predict how the economy will perform or how consumers will respond. But the U.S. consumer is being squeezed on a number of different fronts. Personal income growth is slowing, home values are declining, and variable rate mortgages will affect millions of households. As a result, consumers may change their spending behaviors to respond to these financial pressures.

Being prepared for a potential change in consumer spending behavior may be the best medicine for your business. Don't be caught off guard if your customers cut back spending or defect altogether because of increasing price sensitivity. Instead, develop a strategy that can better prepare your business for a variety of potential scenarios.

Every business should incorporate some form of scenario planning into their business strategy, especially in times of economic uncertainty. Scenario planning is a strategy planning method that identifies and anticipates how the business will respond given a series of potential economic or business outcomes.

For example, how would you compete for customers if your competitor cut prices by 25%? Or 50%? What would happen if an economic recession cut the demand for your product or service in half? Would your business be in a position to capitalize if a chief competitor went out of business? What would your business do to prevent a spike in customer defections? Although not every scenario is equally probable, being prepared with a plan or strategy can better position your business to weather any potential economic storm.

Begin your preparations today by creating a comprehensive list of potential scenarios that could impact your business. List all scenarios, regardless of how outlandish they may seem. Then assign a probability factor to each scenario. Those scenarios that have the highest probability should form the foundation of your business strategy in the short term. Evaluate your business's ability and readiness to respond to each scenario then develop a plan to fill any gaps.

Changing economic and market conditions can have both short and long term affects on consumer behavior. Therefore, businesses should review their list of scenarios regularly and continually adjust the probability of each scenario. By doing so, you just might be better prepared to handle whatever the economy might throw at you and your business.
About the Author
Robert Howard is the Founder and Chief Executive of ClearBrick LLC; The do-it-yourself business solution center.

For more on customer strategies, get the free report Five Customer Strategies That Can Work For Your Business.
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