The 2023 Discretionary Dollar Dilemma

What is the discretionary dollar dilemma coming in 2023?

The discretionary dollar dilemma is the challenge that businesses face when trying to attract consumers who have less money to spend. Even when income levels go up, the amount of money that people have available to spend on non-essential items (i.e. discretionary items) remains the same or decreases. This is due to rising costs of living and/or increasing levels of consumer debt. As a result, businesses must find ways to either attract new customers or convince existing customers to spend more money. This can be a difficult task, as it often requires businesses to re-evaluate their products and pricing. Ultimately, the discretionary dollar dilemma represents a significant challenge for businesses in today's economy.

The factors that are leading to the discretionary dollar dilemma

In early 2010 into the teens, US households enjoyed a bounty of disposable income. But then, Covid 19 hit, and discretionary spending went into free fall. What happened? US household credit card debt actually decreased during the crisis, due to restrictions on buying and supply chain issues. The lockdowns caused major fluctuations in the supply chain, spending dwindled, and layoffs happened. US households were suddenly struggling to make ends meet. The government stepped in and moratoriums on paying for rent and mortgages helped with the crunch and then stimulus checks rocked demand. The result was a sharp increase in discretionary spending, creating a bullwhip effect on supply chains

The data tells the story: according to FRED, US household debt as a percentage of disposable income peaked in 2019, just before the crisis hit. During the Covid-19 years, people saved, debt went down, and after that spending resumed. While disposable income has recovered somewhat since then, it is still below its pre-crisis level. In other words, US households are facing a squeeze on their discretionary dollars. And until wage growth picks up or household debt levels start to fall, that is unlikely to change.

So, how does a business need to look at inflation with regard to debt and discretionary dollars?

1.?Inflation is a general increase in prices and a fall in the purchasing value of money.

2.?The main cause of inflation is too much money chasing too few goods. (Thus the Fed's quantitative tightening)

3.?Inflation can be caused by both demand-pull and cost-push factors.

4.?Demand-pull inflation occurs when there is too much demand for goods and services in an economy.

5.?Cost-push inflation occurs when the costs of production increase, leading to higher prices for goods and services.

7.?Negative effects of inflation include eroding purchasing power and causing financial instability.

So where should businesses start? Start here - with an understanding of where you stand in the elasticity equation.

Elastic and Inelastic Goods Definition

Inelastic goods are those commodities whose demand doesn’t change with the price variations. An increase or decrease in the product’s price level doesn’t affect its demand. Even though there will be a slight variation in demand, it will be insignificant compared to the change in price.?

Pricing is usually not an issue for inelastic goods. Inelastic goods can often raise prices during tough times. However, in really tough times - even goods that are thought to be inelastic can see a pullback in demand due to consumer reaction to pricing. (Think driving less, turning down the thermostat in winter, not buying eggs because of skyrocketing prices).

Not evaluating your price versus demand can put you behind your competitors. They grab market share - you're now priced incorrectly, losing market share, and have to battle even harder (spend more marketing dollars) to get your market share back.

Move too quickly on this and while you may gain market share, you also may be giving up margin dollars. The wrong side of the curve is well - the wrong side of the curve!

For those that like the math...

A quick chart that gives you a checklist to help guide you in understanding your positioning.

Elasticity and Inelasticity don't tell the whole story when it comes to building a business. You need to know how to manage your warehouse business (CPG) for success. In the service business, it can be viewed as the resources that you anticipate you need (people assets) to service your customers.

How the Bullwhip Effect Plays Into The Game

Or - What's in your Warehouse?

The economic bullwhip effect is an avoidable consequence of business dynamics when goods and services are being moved through multiple levels in the supply chain. This phenomenon explains why even slight fluctuations in consumer demand can have a significant impact on different members of the production line, such as buyers, wholesalers, and retailers.

The Covid years have produced one of the largest bullwhip effects in recent history. Supply chains stopped, people couldn't get goods, and companies ordered more in anticipation of demand. People bought - but were then satisfied and didn't want more. Just-in-time supply chains were broken and the whip snapped on many companies (packed warehouses - no demand- lowered prices - sell off - no reorders - demand builds - low inventory - prices rise...you get the picture).

To prevent this chaotic oscillation, companies must adopt agile supply-chain management strategies that utilize responsive communication and relationships with vendors to counterbalance rapid change in order for products to reach the customer in due time.

The amplification of demand snaps pricing back down, causing a reduction in pricing due to the retailer needing to sell the excess inventory at discount. Interestingly and perhaps a little sadly, many people with debt and spending issues are psychologically encouraged to buy products they may not necessarily need by credit to get what they perceive as a "value". These consumers may buy this on credit, not realizing the actual amount in cost plus interest.

How businesses can overcome the challenges posed by the discretionary dollar dilemma

Any business faces the challenge of the discretionary dollar dilemma- how to get customers to spend their hard-earned money with you rather than on your competitor. The key is to have a recent and fluid go-to-market plan. This helps ensure that you are focused on current consumer behavior.

Your Go-To-Market plan should include an analysis of your target market, your unique selling proposition, and your marketing mix. This gives you a clear understanding of who your customers are and what they are looking for. It also helps identify your key strengths and how you can use them to differentiate yourself from your competitors. Once you have this information, you can develop a marketing strategy that is tailored to your target market and is designed to achieve results.

By taking the time to develop a go-to-market plan, you can overcome the challenge of the discretionary dollar dilemma and ensure that your business is successful.

1. Understand what "uncertainty" means for your industry

2. Anticipate changes in your customer base and adapt your marketing strategy

3. Evaluate your current marketing efforts - are they still effective?

4. Be prepared to make quick decisions and changes to your marketing plan

5. Stay positive and optimistic, even when the future seems uncertain

6. Lean on your network of colleagues and advisors for support and guidance

Let's get more granular on what you can do in the short term.

Chunk Your Product (plugging the concept of Triz here)

Can your product be:

• sold in installments
• split into segments (especially if each segment is useful)
• downsized (think right sized though - too small may be a turn-off - a hamburger is not a slider)

Can you create "Small Delights"? First coined by Faith Popcorn and her Brain Trust. As my early mentors said - Add Value. What additional value can you add - for one client in CPG it was recipes. For another, it was a free webinar on how to write a resume.

And a cautionary tale...Don't Play Into Bullwhips.

An example of companies that have succeeded in spite of, or because of, the discretionary dollar dilemma

The discretionary dollar dilemma is the challenge that companies face when trying to convince consumers to spend their money on non-essential items. In difficult economic times, people are often reluctant to spend money on luxuries, preferring to save or invest their money instead. However, there are some companies that have been able to successfully navigate this dilemma. One example is Lululemon, a high-end athletic wear company. Lululemon was founded in 1998, during the Dot-Com Bust, and has thrived in spite of (or perhaps because of) the fact that it is a luxury brand. The company has succeeded by appealing to the psychology of spending: rather than simply selling products, Lululemon sells an experience and a lifestyle. It also provides small delights, such as free yoga classes and in-store massage services, which help to create a sense of community and loyalty among its customers. As a result, Lululemon overcame to overcome the discretionary dollar dilemma and become a successful business.

What to put into action.

1. Evaluate your product or service for elasticity

2. Research your target market - what level is inventory today including your competitors

3. Create a marketing strategy that works for this economy - be realistic (pricing is part of the plan)

4. Implement your marketing plan - Data, Data, Data - then what-if planning

5. Evaluate your results and make changes as needed - often!

6. Be flexible to change direction as the market changes

The future of the discretionary dollar dilemma

It's no secret that consumer debt levels are at an all-time high. And with interest rates on the rise, many experts are predicting that the situation is only going to get worse.

Some say that we're headed for a consumer debt crisis, while others believe that laser marketing and go-to-market tactics will keep consumer spending strong. But the truth is, no one really knows what's going to happen.

What we do know is that the discretionary dollar dilemma is not going away anytime soon. And whichever side of the debate, elasticity or supply chain you're on, it's important to be prepared for what the future might hold.

The discretionary dollar dilemma is a real and pressing challenge for businesses, but it is not insurmountable. By understanding the factors that led to the dilemma and taking steps to overcome them, businesses can thrive in spite of – or because of – this new economic reality.

In order to create a successful Go to Market strategy in 2023, businesses must first understand the discretionary dollar dilemma and how it impacts their customers. Only then can they begin to craft a plan that resonates with these consumers and drives sales.

Bringing it all together and why this matters

Discretionary dollars are just that - people decide to spend with you or not. So...

Don't shirk the hard work.

A personal example - competitors were HP, 3M, and Dupont. We were a much smaller company entering into a new market that they all wanted. We were first to market and they were coming fast. Our pricing was priced accordingly - we needed to make sure that we would lose the minimum market share while maximizing pricing. (They were going to undercut us and let's face it - big names - big reputations).

A quick Monte Carlo Simulation (MCS - ok, they are never "quick") gave us the edge. We changed pricing just as they entered the market, adjusted our pricing, and managed the warehouse purchases (no bullwhip).

Today while different, is really all about understanding your market, consumer behavior (ha! that's a tough one, it's up next!), and your probabilities.

You don't need to go as far as an MCS - but you shouldn't shirk the work.

Need help? Let me know.

Dedicated to my Dad - an economist, philosopher, and mathematician - one of the three founders of Charles Rivers Associates. Miss having these discussions with him - so you're up! Comments and discussion are welcome. Where do you see 2023 heading?