Cash in on the Aldi effect

It's an oft-reported phenomenon that in times of recession, lipstick sales go up. Strange, but actually, when you think about it, quite logical: according to a piece in The New York Times, women replace purchases of big-ticket items such as handbags or coats with small, 'feel-good' items - like lipstick. They still get a buzz - the cost is just considerably less.

During this recession, the byword for that effect has become Aldi, the supermarket which sells its products at bargain basement prices. No longer the preserve of Vicky Pollard-alikes trawling the aisles with prams stuffed full of screaming kids; suddenly, the middle classes are finding themselves strapped for cash, and abandoning Waitrose and Fresh'n'Wild in droves - opting instead for Aldi and Lidl, which sell the same goods, but at dramatically lower prices. In fact, it's become rather fashionable: conversation at posh dinner parties has moved from 'you must try the olives, they're organic', to 'they're from Lidl, darling - 69p.'

We don't want to cut costs in terms of our actual products, but with variable costs like marketing and advertising - that's where there are deals to be found.

So how do these supermarkets manage to keep their costs down while selling food of a high enough quality to please even the Jamie Oliver brigade? Naturally, it's all about economies of scale. "We strip out any extra costs," explains Julie Cheston, a spokesperson for Aldi. "We only stock 1,000 lines and don't duplicate any products, so we can buy large amounts which keeps costs down."

Of course, most small businesses are unlikely to have the cash to buy large enough quantities of a product to make an approach like that viable. It's also dangerous - unless you can be sure a product will sell well, hedging your bets by buying a huge amount of merchandise and then watching it accumulate dust on a shelf can be heartbreaking, not to mention lethal to your cashflow.

But is there another way for small businesses to can cash in on this craze for bargains, or are small firms set to bear the brunt of the downturn? One of the keys is keeping your variable costs down and then passing that saving on to the customer.

Simon Duffy founded his business, Bulldog, which manufactures natural grooming products for men, about a year ago. He says while his business hasn't yet felt the effects of the downturn, he's already looking for places to save money.

"We don't want to cut costs in terms of our actual products, and one of the things we will start to see is the prices of the individual ingredients which go into our products will face pressure to go up. They're expensive - but outside of the ingredients, variable costs like marketing and advertising and things like that - that's where there are deals to be found."

Another place to look is at your energy bills. While the downturn may have overshadowed the green movement, there are still potentially savings to be made. From switching off computers and air conditioning at the end of the day to fitting energy saving light bulbs and extra insulation, it's estimated most small businesses could save about 20% of their energy bill by being more vigilant with their fuel consumption.

If you do manage to cut your overheads, be transparent about it, says consumer psychologist Felix Economakis. "This is what these supermarkets do well. It's about saying 'we're working smart here - we've managed to cut down waste and be more energy efficient' or 'we've tightened up this and that - and we're passing on that value to you without compromising on quality'."

Duffy, whose main distributors are supermarkets, says he has also seen a rise in deals. While this usually means suppliers have to sell their stock to their distributors for less, Duffy says in the long-term, it's an advantage - particularly if you're trying to hook customers for the first time. "Consumers are looking for bargains. If you give them some kind of incentive, they're more likely to return - and if they like the product, they'll buy it when it goes back to being full-price."

Economakis agrees. "The thing is, we're not very rational when we buy - we look for the bargain, rather than asking ourselves whether we need this thing. Deals provide a guilt-free shopping experience. People say 'I got three - but they were only £10 each."

What about if you can't reduce your prices, though? Charlie Mullins, who owns Pimlico Plumbers, a premium plumbing service in London which prices its offering based on a high quality service, explains if you can't cut costs, trying to cut prices could be deadly.

"I don't think undercutting prices is a good policy at all. You're putting yourself under tremendous pressure - the price-cutting business in plumbing is suicidal," he says.

Instead of cutting prices, Mullins has added value to his offering. "Rather than try and reduce our price, we've increased the quality of our service. We now employ better engineers, we make sure their training's up to date, and we make sure they get to the jobs quicker - we've had tracking systems fitted to the vans.

"What we've actually done is improved the service, giving more value for money. The idea is that an engineer can go to a job, diagnose the problem quicker, and solve the problem quicker. We also carry more stock on the vans - so rather than reduce the price, we've increased quality of service, and even with the recession going on, we're hitting a record number of jobs."

Economakis adds that giving consumers that little bit extra will make them feel indebted to you. "Working on customer service, brightening up the shop, adding value somehow, even if it's free newsletter or if you're a deli, free muffins or free cookies - that kind of thing makes customers feel great. They think, 'this company cares more about the customer than about the money'. We're all looking for a place that offers that."

While the downturn may see a zero or two knocked off the wealth of the super-rich and the very poor continuing to target the lower end of the market, those in the middle, struggling with credit card debts and mortgage prices, are looking for extra value from the services they use.

So whether you're a small boutique, a massage therapist or a car mechanic, keep this in mind: It's the lipstick-buyers who want to be swayed.

 

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