It’s no secret that consumer behaviour is shifting. It shifted during and after the pandemic, and it’s moving again as wallets tighten. For businesses, this is undoubtedly a cause for concern – and rightly so. When consumer behaviour changes, it leads to uncertainty in revenue and all the logical flow-on effects. But how does your business grapple with these changes and regain control of its revenue?
The answer lies in understanding two things: how the consumer’s behaviour has changed and how that is impacting your business, and using that to hypothesise the drivers behind the shift. Once those two things are well-understood, the business can begin to correct course by implementing initiatives that directly address these drivers. And the secret to understanding those two things? Your data.
In this blog post, we’ll explore the crucial role of data in deciphering changing consumer behaviour, and provide insights on how your business can more effectively utilise the data it already collects to navigate the shifting tides of consumer behaviour and seize opportunities for growth and success in a difficult market.
Tapping into your own data
We’ve spoken at length about the basics of customer insights and how businesses should be using this information to understand their customers — so if you haven’t given this a read yet, we recommend you do. But the gist of it is, your own data already tells you plenty about your customers.
You just need to take a good hard look at it.
Now, the exact way you analyse this is going to depend on the type of business you run, and your goals/objectives — there’s no getting around that. Generally speaking, there are a few core metrics that will neatly describe the overall health of your relationship with your customers using just basic transactional data that every business has:
- Frequency: how often are your customers returning to buy from you?
- A reduction in frequency may mean a few things, including your sales/marketing process becoming less effective, your customers’ wallets tightening, or other issues that mean your purchasing funnel has become more difficult to traverse.
- Recency: how recently did your customers make a purchase?
- Even if your frequency metric looks okay, it mightn’t capture the full picture — because some of your customers may be disengaging with your brand. Mapping out the recency of your customers’ purchases can shine a light on this.
- If you have a large cohort of customers who haven’t purchased in X days, then it’s likely that these people are disengaging from your brand. You should ask yourself why this may be — the driver (informed by the metrics above and below) — and what potential intervening action you can take to remediate the issue.
- Retention Rate: what percentage of customers continue to engage with your brand over a specific period?
- Now if you’re a subscription-based business, this is much easier as you can clearly measure when a subscription cancellation happens. You should probably be measuring this as a churn rate (either revenue churn or member churn) — we recommend the formula defined in this post by Recurly.
- If you’re not a subscription-based business, you’ll need to use a statistical model to describe the retention of your customers. The entertainingly-titled family of models called “Buy ‘Till You Die” are a great example of this. They do require much more custom code to run, so we’ll be posting a guide on this in the coming weeks – stay tuned!
- Customer Lifetime Value: how much value does each customer generate over their lifetime?
- Once you have a good grasp on your retention rate, you can form a picture of the lifetime value of each of your customers — are they spending $100 over their lifetime or $1000?
- This directly speaks to how much you should be spending on your acquisition costs – Cost Per Acquisition must be lower than your lifetime value — but it also directly speaks to your long-term expectation of revenue from your existing customer base. If your LTV-over-time metric is dropping, this usually isn’t a good thing (unless you’re targeting a new/lower-value segment) so you need to establish why it’s dropping. Basically, it’s either your retention is getting worse, or the average transaction value is getting worse (or both) — but the reason for that is something you need more research to make an informed decision. See the section below for more details.
- Segmentation: categorising your customer base into distinct groups based on various attributes or behaviours.
- We’ve also spoken a lot about segmentation in the past too, so we won’t spend too much time explaining it again here. The gist of it is, by establishing your key segments, you can overlay the above metrics and form an even better picture of how customer behaviour is shifting. Why is frequency stable overall, dropping for segment X but improving for segment Y? It might be down to changes in your pricing, or perhaps your marketing has shifted more towards targeting segment Y — but you need to see how the numbers stack up before you can make an informed decision.
Your business doesn’t operate in a vacuum, and neither should your analysis. You need to consider external influences on your business and industry to truly understand the shift in consumer behaviour.
You should be monitoring – at a minimum – metrics from the ABS on household spending in your sector. This is new and built off direct access into the bank’s transaction dataset so it’s incredibly accurate and up-to-date. You can access this information here.
You should also investigate what industry research or publications exist that may speak more directly to your challenges — for example, peak bodies often conduct research on behalf of their members. If you’re a member, reach out to your peak body and see what data they may have collected or who they can put you in touch with.
Your competitors are also a useful source of insight. Have they changed tact recently — pricing, promotion, product? That can speak to not only their challenges but potentially how they’ve pivoted to address them. Use that insight to inform how you might address some of your own challenges. Not necessarily by copying, mind you, as there’s no guarantee that their changes will work for your customers.
In some industries, you can also directly get data on your competitors by monitoring inventory levels and the like. There’s a whole field of competitor analytics you can tap into. We’ll be talking more about competitor analytics in a future blog post — so stay tuned for that.
For now, you should also be keeping across industry trends in general. Changing consumer behaviour may also be caused by innovations disrupting your sector — there’s no better example than Uber storming into the market and disrupting taxis. That insight wasn’t sitting in the taxi’s datasets — it was sitting in the industry datasets.
Identifying the drivers of behaviour shifts
Once you’ve established your internal and external views on how consumer behaviour has changed, we need to establish the drivers.
There are a few options to explore here — and you probably will need to do multiple:
- Surveys: particularly suitable for large datasets. Consider the sample size (you’ll need high hundreds if not thousands to form a good picture), the mechanism (how do people respond) and the incentive (they probably won’t do it for free).
- Customer interviews: perhaps more effectively, you can speak directly with your customers through an interview. While you won’t get as much rock-solid data, you will gain a deeper understanding of your customer’s behaviours. Don’t be afraid to speak with your customers. It’s critical.
- Social listening: consumers may be expressing their sentiments through social media platforms and other venues. Off-the-shelf tools can help you listen in on these online communities, or for more bespoke applications we develop solutions to do this for you. In any case, understanding what’s being spoken about here can inform your view of the drivers of the behaviour shift.
Once we have these drivers — the next question is quite obvious: how do we intervene and correct the course of your business?
We’ll be talking about how you can easily devise and implement interventions in our next blog post. Stay subscribed for more details by entering your details below.