New research published in the Journal of Consumer Research found that if you can retain customers when they downsize their budget, they will spend even more than before once they recover.
Here's a 3-min summary of what the study found and some recommendations
Work hard to retain your customers when they are going through a temporary budget reduction or similar constraints. For example, give them a subscription at a minimal cost for a limited time. You want to be among the brands they choose to keep on their reduced list.
When their budget grows back, they will spend more on you rather than go back to the brands they dropped.
- When people suddenly have less money (e.g. lose their job), time (e.g. have a child), or space (e.g. move to a smaller house), they need to cut down on what they want to ‘spend’ on (used as a general term for money, time and space).
- This means they are forced to rethink and prioritize their spending preferences.
- The revised preferences are carried on once they return to their full budget. If a person stops buying a brand when their budget contraction happens, they are unlikely to return to it. Instead, they will spend more on the brands they kept using.
- Additionally, people become more satisfied with less compared to what they had before, once they return to their full budget.
- The stronger the temporary spending contraction, the stronger the effects.
- This likely also applies to other types of spending contractions due to the COVID-19 pandemic (e.g. if we go out less often, we will spend our limited time outside in fewer stores or restaurants), although this was not directly tested. Post-pandemic, we will probably be satisfied with a simpler lifestyle.
Why it works
- When we are forced to rethink our preferences, we self-reflect about what we value. Something we don’t usually do.
- Once we have a better idea of what we like and what we don’t, our new preferences remain unchanged even when our budget grows again.
- Due to this self-reflection, we also become happier with our brand choices because we’ve developed a clearer idea of what we like or don’t like.
- The strengthened brand attachment that develops is similar to what happens in other cases. For example, brands that we get used to early in life (e.g. a food we ate as kids) or when we need to make a difficult decision or repeated choices to choose a brand over another.
- Researchers only observed how people re-allocated their budgets on their own, without intervening. So we don’t know for sure what will happen if we intervene, there could be additional effects that weren’t studied. For example, a special offer could make a customer feel grateful, or it could backfire and greatly annoy them while they are going through a stressful time.
- The temporary budget contractions the researchers studied were relatively short (between 2 days and 2 weeks). It’s not clear if something changes when contractions are longer.
- We don’t know if the effects are different for people who go through contractions often (e.g. someone who changes job or house frequently).
Companies using this
- Many B2B companies have a close enough relationship with individual customers to intuitively offer flexibility to those going through temporary shocks, and try to retain them. In this environment, customers are also more likely to proactively ask for a respite.
- It’s very rare for B2C companies to have mechanisms in place to retain customers going through temporary budget contractions.
Steps to implement
- If you are in B2B, be understanding and open to delay or temporarily reduce invoices. For example, if you are a hotel cleaning service or travel booking software during the COVID-19 pandemic, which has hit the industry hard.
- If you are in B2C, it will be harder to discern customers that are leaving you due to a temporary budget shock compared to other reasons, but you can test innovative ways. For example, if you are a telecom provider, you can make it easy for customers to tell you they are in distress (previous research shows people are much more honest than we think in these matters). This would activate a suspension or reduction of their bills for a period of time, while still providing service.
Online and lab experiments, and market observation of the US government shutdown (Dec 2018 — Jan 2019), United States
Ross, G. R., Meloy, M. G., & Carlson, K. A. (Forthcoming, October 2020). Preference Refinement After a Budget Contraction. Journal of Consumer Research, 47(3), 412–430.
Link to paper
Note: Because of the groundbreaking nature of this research, it could be disproven in the future (although this is rare). It may also not be generalizable to your situation. If it’s a risky change, always test it on a small scale before rolling it out widely.