We’re in a Discretionary Spending Recession
There’s been a sudden but real disruption in advertising results for businesses who sell discretionary products and services, and it’s quite apparent we’ve been in a discretionary spending recession since the start of the new year.
This disruption in advertising results was partially masked at the start of the year because there’s always a traditional slow-down immediately after the holidays while consumers are distracted by new year’s resolutions and holiday hangovers, literal and figurative.
However, the typical slow-down never ended. Some examples of advertisers who’ve seen huge drop-offs in lead generation and engagement include:
- Elective Medical Procedures
- Luxury Personal Goods
- Home Improvements
- Non-Essential Retail
What Headwinds are Causing the Disruption in Advertising Results?
We’ve been monitoring macro-economic conditions that appear to be contributing most to the disruption in advertising results. Why are consumers freezing up?
The three factors we’re tracking that have caused the discretionary spending recession happening right now include:
(1) Consumer Spending Dropped in January. That’s the first time in over 2 years. And consumers’ inflation expectations soared in February. News reports blamed snow on the East Coast and wildfires on the West Coast for slower spending, but we’ve come to believe the issue is much broader than that.
(2) Lower IRS Tax Refunds. Historically, IRS Tax Refunds help drive a lot of discretionary purchasing during the first half of the year. Consumers often use tax refunds to make larger purchases, or a series of smaller purchases — often thought of as rewards to be harvested from “found money.” According to a recent CNBC article, this year IRS Tax Refunds are averaging 32.4% less — or roughly a third lower than normal.
(3) Credit Card Balances from 2024 “Revenge Spending.” The average credit card balance per household is at an all-time high, as is total credit card debt. And, perhaps more importantly, borrowers are now making only minimum payments at higher rates, and delinquencies are on the rise.
(4) Consumers are in “Wait and See Mode.” Much of the freeze is simply consumers waiting to see how tariffs, renewed inflation, and Federal government disruption will affect them personally. A few quick stats that illustrate this point:
- 90% of adults say they are still surprised by the cost of some goods
- 23% expect their credit card debt to worsen this year
How Marketers and Advertisers Can Respond
If you’re in a business that’s been negatively affected by this discretionary spending recession, here are some ways this is probably playing out for you:
- Lower Engagement Rates
- Lower Conversion Rates
- Fewer Actionable Leads
- Lower-Quality Leads
This disruption in advertising results can be met with a few different strategy responses:
(1) Bid Up Conversions in Search Engine Marketing (SEM). If you’re using Google AdWords or other SEM, consider bidding up conversions that yield an actionable lead. This might be a phone call or filling out a web form, for example. Remember that Google will ALWAYS figure out how to take all the money you and your competitors budget; so if the overall market (TAM) is smaller — meaning fewer people are in-market — the quality responses are getting watered down. Bidding up conversions may help you pull your best prospects from other competitors’ ads.
(2) Take Fewer Ad Risks. In a shrinking market it’s time to focus on what’s been working and have a quicker trigger finger to reduce budgets that aren’t performing. Better to live to fight another day…
(3) Experiment with Alternative Messaging and Reach Strategies. Advertising success is always a function of how successfully you combine TARGETING, MESSAGING, and REACH. During this time of stress on results, there may be ways to update your messaging strategy and better relate to where consumers are right now. Examples may include focusing on financing as a way to reduce the risk of buying right now. It may also be a time when you need to reduce prices temporarily. It’s also a good time to test adjustments with smaller budgets.
Most importantly, you’ll need to monitor more closely to get a sense of when frozen consumers begin to thaw out. And be ready to re-deploy at full-strength when we come out the other side of this discretionary spending recession. When the disruption in advertising results ends, that’s the time to take all the dry powder you’re storing right now and get it working for you!
We’re Happy to Help
Many of our best customer relationships have been born out of stressful times. If you’ve experienced a disruption in advertising results due to this discretionary spending recession, or you just know you need to take a look at how your marketing is deployed, we can help.
We always offer a free initial consultation and analysis. Just book a brief call with our team and we’ll take that opportunity to listen and learn. Then we’ll follow up with recommendations, all without any obligation. That’s just how we invest in you long before you invest in us.
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