How Small Businesses Can React to Falling Consumer Confidence

Falling confidence is feared by businesses the country over. It’s part of a feedback loop that can allow a small economic shock to escalate into a far more severe recession.

When the confidence of consumers begins to fall, customers visit stores less frequently and tend to put off larger purchases. This deprives businesses of the revenues they need to maintain a staff payroll and a healthy profit margin. This can lead to lay-offs across the UK which further reduces the discretionary income of shoppers. And so, the cycle repeats.

What causes a fall in consumer confidence and how is it measured?

The initial triggers can vary but include a fall in the value of the stock market or property markets, inflationary pressures that reduce the real value of wages, or interest rates that make borrowing more expensive.

Consumer confidence is measured by the GfK Consumer Confidence Survey, which is used by the government to make key economic decisions. Recent reports indicated that confidence in October 2022 had recovered to pre-pandemic levels, only to take a severe hit due to the crisis of inflation currently gripping the country. The confidence index now sits 30% below its starting level in 2016.

How can small businesses react?

Small businesses are inherently flexible and are able to take strategic decisions to adapt to changing trading environments. Here are just some of the methods businesses are using to cope with low confidence:

• Focus on core products and profitable services
• Reassess business insurance
• Run discounting campaigns

Focus on core products & profitable services

As companies expand in a buoyant economy, they add new products and services to their range. This leads to increases in revenue, at the cost of greater complexity and overhead.

Businesses often underestimate the impact this complexity has upon the profitability of their overall operation. They tend to focus on the incremental gross profit earned by additional products, without considering the step-change in overheads to hire managers and generally make their business more onerous to run.

When consumer confidence falls, revenue from ancillary products and services can fall away too, making these business units unviable. It can be logical to cease these lines of business to cut the overheads of the business back to its absolute minimum, and focus instead on the larger lines which can continue to generate healthy profits even on a lower turnover.

Reassess business insurance

As margins become tighter (or even negative), a business manager must become more sensitive to the risk of one-off expenses appearing out of nowhere. If cash reserves are dwindling, then a single large expense like repairing roof damage could cause a business to go under.

It’s the job of a wide-ranging small business insurance policy to protect businesses against freak events, and therefore a business should carefully review their current policies to assess that adequacy.

Run discounting campaigns

It may sound counter-intuitive, but a logical approach to falling confidence and revenues may be to cut prices.

A time-limited discounting event on large-ticket items could give consumers a compelling reason to buy now, rather than waiting for certain times. Many large purchases such as cars, white goods, gas boilers, home renovation and TVs can be deferred almost indefinitely as most consumers are upgrading from an older (but still functional) model.

To be effective, a campaign must have a credible deadline that consumers believe. If your company already heavily discounts stock year-round then you may find that potential customers don’t bat an eyelid at your offers. However, if you can make the case that this promotion is special and will only take place for a specific period then this can create a sense of urgency to compel a buyer to take action.

Overall, small businesses can take full advantage of their ability to take and execute strategic decisions quickly – without seven levels of approval being required. Simplifying your business, checking you are insured against freak events and discounting your products and services are some of the ways in which you can flex your operating model to keep your confidence, even if your consumers are losing theirs.