The financial crisis taught us many things but one of the key things is that we don’t really understand risk. Risk is not just about gambling and the potential thrill of winning money. And it’s not just the rush you may get from bungee jumping, hang gliding, jumping out of a plane, or any of the multitude of ways that humans have figured out how to enjoy life while risking that very same thing.

Just about every moment of every day, each and every one of us is a risk evaluation system. Driving to work or school is a constant monitoring of risk, as a student you may risk passing an exam by going out drinking. Some worry about the risk of illness and coat themselves in anti-bacterial stuff.

But interestingly, we, and by we I mean all people, suck at risk assessment. We build homes in floodplains, hurricane zones, and earthquake areas. We won’t swim in the ocean for fear of sharks, while sitting in the sun without putting on sunscreen, thinking that the risk of being eaten by a shark is greater then the risk of skin cancer.

It’s not.

Each year, 8,000 melanoma deaths in the United States are linked to ultraviolet radiation, and another 1.5 million cases of skin cancer are also linked to UV exposure. Contrast this to shark attacks on a global scale: the year 2000 had the highest number of shark attacks since 1990, but only 11 people were killed out of a total of 79 attacks.

Eight thousand deaths in one country vs. 11 deaths globally.

Clearly, we have a poor understanding of the risks involved. All it takes is more accurate information to help us make the right decisions – which is why I always enjoy a swim at the beach, protected by a layer of high-SPF sunscreen. What a difference the right information can make.

The same goes for business. The right research tells companies how to understand and manage consumer risk. Understanding what consumers want will minimise product development risk. Understanding how many of these products consumers will buy, minimises production risk. Knowing how much they will pay for your product will minimise financial risk. And lastly, understanding your consumers as people will help you minimise marketing risk.

The current financial crisis has posed two inter-related sets of risk on marketers. In the case of the United States, much of the spending spree was fuelled by households that had stopped saving. Since the crisis began, US households have increased their savings from essentially zero to roughly 2%. Each 1% increase in savings removes $100 billion from the consumer economy – in other words roughly $200 billion is no longer being spent by US consumers. Second, consumers can change the way they spend.

Given the two risks, less money being spent and different ways to spend it, it is vital for marketers to understand their consumers. The two main strategies that consumers can adopt in times like these are to either reduce their purchasing or change their buying habits. Both have consequences for manufacturers and retailers alike.

Research by Synovate in the North American market has shown that consumers are divided into four groups (outlined below). While some have maintained their lifestyle, many have been forced to reduce their purchases, switch to cheaper brands, or both. Regardless of the sector the new consumer behaviour has massive implications for your business.

If you are in the FMCG world consumers can switch from higher priced brand names to lower priced no-name products. We all need soup and nuts, we may not need the same brand, or we may try to get by with fewer. Likewise for more discretionary purchases, take coffee for instance. Many have traded their morning ritual of a high priced “Grande latte” (fill in your favourite Starbucks here) for either a lower priced “regular” Starbucks coffee, or a McDonalds or Dunkin’ Donuts alternative.

Based on the research, Starbucks and their particular version of affordable luxury was at risk for lower sales from 68% of the market. Each and every one of those lost Starbuck sales is either a switch to a lower cost brand or a loss to the entire category. The retail sector has been hard hit by the changing dream. Luxury retailers have seen their sales plummet as some simply stopped their purchases and other switched to a lower priced alternative. 

What can marketers do to mitigate this risk? First, you need to know who your customers are and what they are thinking. This may be as simple as following discussion about your brand on Twitter. Or maybe you need to go deeper and track in-store behaviours to identify where consumers are spending their time and money. There are myriad solutions available to gather information on your particular brand; it’s a matter of knowing what type of research will provide you the information you need.

Once you’ve got the information then you know how to manage the risk in your business by planning strategies that will resonate with consumers. With the tightening of budgets in the past year, we’ve all grown used to thinking constantly about risk. But rather than falling into a negative spiral – in both your mind and balance sheet – the right data can help you find the opportunities that exist and put your brand back on track.

For more information, contact Dr Stephen Popiel.