How inflation will affect your customers – and your business

“Inflation can have a different impact [on consumer habits] depending on the socioeconomic status groups of people in the economy,” adds Dr Akhtar. “Usually, inflation hits hard on low-to-middle income earners, but not so much on the rich and wealthy.”  

This means that your experience as a business owner will depend on who your customers are, and what you sell (do you sell essential items such as milk and bread, or more discretionary services like massages?).

More broadly, a recent survey from U.S.-based data and tech company Numerator found that 54 percent of consumers are concerned about future price increases and more than 90 percent plan to change their shopping behaviors with further price increases.

Specifically, customers are…

Looking for value

The Numerator survey found that more than half of consumers planned to switch to lower-priced options, seek out additional discounts and promotions, and slash their discretionary budget (referring to a cost that a consumer or household can survive without).

Switching brands

With shoppers seeking out value above all else, a loyalty shake-up is afoot. According to McKinsey, more U.S. consumers are switching brands and retailers now than they did in 2020 and 2021, and about 90 per cent plan to continue to do so.*

Spending on experiences

In the current climate, if consumers are going to part with their hard-earned cash, they want it to be on something memorable. According to Afterpay’s On The Rise report, recreation is among the fastest-growing categories for Gen Z and Millennials, growing about 90 percent year over year. As such, spending on experiences and travel is expected to boom in the coming months.

Comparing prices

Afterpay’s On The Rise report also found that the top three ways that Millennial and Gen Z consumers are saving money are purchasing cheaper alternatives, buying during promotional periods and comparing prices across channels. This means that pricing needs to be a key consideration for retailers.

How else will inflation impact my business?

As well as consumer behavior, inflation can affect other parts of your business. This could include increased running expenses (such as electricity and loan-repayment rates), supply pressures due to higher costs of materials, increased shipping costs and possible delays, as well as wage increases if staff members request them.

One small-business owner who has already started to feel the pinch is Kerry-Anne Blanket. Her business, KAB Gallery, located north of Sydney, Australia, has noticed a recent change in expenses.

“We operate two brick-and-mortar [art] gallery spaces and are online too, and I have already found inflation significantly impacting my business, namely shipping costs,” she says. “Large crates of art that I would typically be able to ship internationally for around $800 are now being quoted to cost $1300.”

This increase is starting to deter some collectors, she says. To combat that she plans to focus on stocking work from artists with the strongest sales history, and consider ways in which she can positively engage repeat clients via her social media and contact book. Being aware of rising costs and being able to pivot is the key, she says.

What can I do to safeguard myself against the effects of inflation?

Luckily, there are some tried-and-tested methods to help your business navigate this rise in inflation. The most important, according to financial advisor Nathan McCallum, is to assess where you are right now and reflect on where you want to be in the future by making your business plan watertight. 

“By understanding your existing position, business costs and profitability, you can decide on what your goals are and then create a new business plan,” he says. “Try to indicate what inflation is predicted to be, and discover where you've got exposure to those expenses, while also considering your wages and your employment costs.” 

For his clients, McCallum recommends having three business plans: a 10-year plan, three-year plan, and a business plan for right now. Within these plans, he says to explore and review any ‘hidden costs’.

These might include:

• Loans with variable interest rates
• Profit margins vs. predicted inflation rates
• Unnecessary expenditures
• Regular bills such as insurance or utilities

When it comes to driving maximum value from your customer base, one strategy to focus on is customer retention. It’s an area that McCallum says most businesses could be better at and, in fact, research shows that 44 percent of businesses focus on customer acquisition, while only 18 percent focus on customer retention. Now, he says, is the time to secure your customer base. 

Some ways to retain your customers, while also attracting new ones:

Get savvy with your sales: Forbes reported that 50 percent of consumers plan to seek out additional discounts and promotions if inflation continues, so consider doing an after-sale discount emailed to recent customers, or a newsletter-only sale/discount. Perhaps a "secret sale" for your most valued clients might be beneficial, or a referral credit. Could a 48-hour sale be valuable, or an auction of your best-selling products?

Find out how to create smarter discounts

Offer alternative ways to pay: Amid inflation, Gen Z and Millennials are turning to "buy now, pay later" (BNPL) options, as revealed in recent Afterpay research. Nearly 40 per cent of surveyed shoppers said they believe BNPL is an effective way to deal with rising consumer prices.

Center the customer: With rising costs, now is the time to double down on your business’ performance and quality, focusing on strategies for long-term customer retention. Look at any complaints you might be getting, or potential pain-points for your customers. Are there other ways you could connect with your repeat customers, such as a loyalty program, festivals, online shops on Instagram or collaborations with other brands?

Offer bulk sales or prepay options: Some customers may be looking for ways to lock in prices for the next financial year, so offering bulk sales, price-fixed subscriptions or pre-pay options could be a clever way to both attract and retain customers.