How rising costs will shape consumer behavior in 2023 and beyond

Rising costs have become a fact of life in recent years. With stubborn inflation, marketing teams need to consider how rising costs will shape consumer behavior in the foreseeable future. This article will provide you with the insights you need.

European inflation rates are still high. While they have dropped into single figures since the end of 2022, inflation of 8.5% across the Eurozone is a concern for consumers and businesses across various sectors.

Graph over inflation rate in Europe 2022-2023

Source: Eurostat

Macroeconomic conditions caused by the COVID-19 pandemic and Russia’s invasion of Ukraine continue to make an impact.

So, what are marketing teams to do? How can we adjust to rising costs and engage consumers?

We attended a recent Microsoft Advertising event in Sweden. It was full of up-to-the-minute research and insights from around Europe. Let’s look at some of the most important findings to see how they will shape consumer behavior and decisions over the coming months and years.

The situation

The last few years have been a challenging time for Europe. The pandemic, Ukraine, rampant inflation, and recession worries have been significant headaches for European citizens and businesses.

However, green shoots of recovery are starting to emerge. It could be time for some cautious optimism.

COVID-19 cases are down

While the legacy of the COVID-19 pandemic is still with us, cases have declined thanks to vaccines and immunity.

Graph of number of new covid cases since 2020

Source: Statista


Inflation

Inflation in Sweden is still higher than the European average of 8.5%. However, rates are down slightly from record highs in December 2022 but still at around 12%.   

Graph of inflation rates in sweden

Source: Tradingeconomics.com

Consumer confidence

Recession worries over the last year have hit consumer confidence. However, OECD data suggest that the picture is starting to change, and consumers are beginning to have enough faith to start spending again.

Graph over customer confidence

Source: OECD.

But what is the sentiment on the ground?

While the data above is positive, consumer sentiment has been slow to catch up. Consumers are still focused on reducing costs through a variety of cuts.

An Office for National Statistics (ONS) survey in the UK this year shines a light on some of the areas that citizens have targeted to save money. Some highlights of the data suggest:

  • 69% are cutting non-essentials
  • 60% are reducing energy spending
  • 48% are looking for cheaper suppliers
  • 44% are lowering their expenditure on food and essentials.

For eCommerce businesses, changes in consumer behavior are a mixed bag. However, depending on what kind of product or service you provide, it could provide a significant boost.

With almost half of all consumers looking to save money by finding alternative products, it suggests an opportunity to win new business through increased advertising and content marketing targeting these consumers.


Trends to watch

Data from Microsoft and Bing helps illuminate how rising costs affect consumer behavior. Let’s look at these trends to see what opportunities they can bring.


1. Computer searches have dropped post-pandemic

Unsurprisingly, overall searches have dropped since the height of the pandemic. Consumers spend more time outdoors or back at work, which has boosted brick-and-mortar businesses.

However, it’s worth noting that search numbers are higher than pre-pandemic rates, demonstrating the long-term impact of digital transformation over the last few years.


2. Consumer electronic searches are up

Searches for consumer electronics are generally up and peaking over their usual December high points.


3. Beauty and personal care search is down

As consumers move away from non-essentials, beauty, and care product search has dipped over the last year.


4. Food and groceries have declined dramatically

The end of lockdowns means consumers are eating out and shopping at grocery stores again. Understandably, this has resulted in significant drops from the pandemic peaks of 2020.


5. Travel is back

Travel has bounced back, with lots of pent-up demand fuelling searches for flights and cruises.


What can search trends tell us?

User search trends from Bing highlight how rising costs disproportionately affect businesses. Non-essentials like beauty and care are taking a hit while travel is up. Additionally, search trends that grew during the pandemic (like food shopping online) are returning to normal.

Are rising costs affecting the type of products that consumers are buying

Rising costs change consumer behaviors. But how do they affect the kind of products they buy? Let’s take a look through the lens of price sensitivity.

These insights come from Microsoft internal data from Q4 in 2021 vs. 2022.

Beauty products

Price sensitivity hasn’t been particularly pronounced in the cosmetics industry. Products priced around €90 or less make up 84% of the total conversions. In the last year, products priced under €45 have grown in popularity, which may indicate the effects of rising costs.

Home and Garden

Home and garden spending has remained roughly the same year over year, with about 70% of conversions coming from products priced at €140 or below.

Clothes and apparel

The last year has seen a shift towards apparel priced at €45 or below. This segment now makes up 43% of apparel spend, compared to 38% last year.

Higher-end electrical consumer goods spending is growing

Purchasing of High-end consumer goods like laptops and phones is on the rise. Goods priced between €340 and €1140 have experienced a 7% y-o-y growth. Interestingly, headphones and headsets are the most significant growth area.

Searches and clicks in Sweden

On a more local level, Microsoft also provides data for clicks and searches by Swedish consumers over the last three years. Here are the trends for some popular segments:

  • Apparel: Searches are up for the first few months of the year, but clicks are below 2021 and 2022 levels
  • Travel and Tourism: Travel and tourism searches are up to pre-pandemic levels, with clicks at roughly the same level
  • Finance: Finance searches and clicks are holding steady, with a slight dip below 2022.


Advertising spending in an environment of rising costs

Dark economic predictions lead to cuts, with marketing budgets often the first to go. However, the IAB Europe forecasts show that some areas more than others will be affected.

Areas marketing spend is set to drop y-o-y

IAB suggests display ads will drop by 2% this year, with non-social display ads taking a 5% hit. Spending on classifieds & directories will be cut by 4%, while social media will dip by 2%.

Areas marketing spend is set to rise y-o-y

Audio (6%) and video (5%) are the big winners for 2023, with retail and search media up by 4% each.

Are cuts a good idea?

Decades of economic data show that advertising and marketing cuts during economic downtimes can really hurt brands.

Per Nielsen Marketing Mix Models data, brands that cut ad spend:

  • Reduce revenues by 2% each quarter
  • Can take 3-5 years to win back brand equity sacrificed during the cuts


Final thoughts

Positive economic signs are emerging, but high inflation is still affecting consumers. Some sectors are taking a hit more than others as consumer habits shift post-pandemic. Keeping an eye on these trends is essential to find opportunities and pivoting your inventory to meet demand.

And finally, beware of the long-term consequences of cutting ad spending; these short-term savings might mean losing ground for good.

 

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