US tariffs are currently dominating the news agenda, with everyone wondering just how much of an impact they will make and to what extent brands will increase their prices. This is a moving situation that continues to evolve so in this article we won’t focus on the tariffs themselves. However, we will take a closer look at the impact of economic uncertainty on consumer confidence and brand loyalty for Shopify stores, and how a loyalty program can help you protect your profit margins.
Why do you need to know about tariffs?
President Trump has announced a comprehensive overhaul of US trade policy, implementing new tariffs on all imported goods.
If you are a US ecommerce brand importing goods – including products, components or packaging materials – from other countries, then you will be subject to the new tariffs.
If you are an overseas business exporting goods to the US – either directly to consumers or to resellers or other businesses – you will also be subject to the new tariffs.
This can impact your brand in a number of ways:
- Increased COGS (cost of goods sold).
If you’re not able to negotiate with suppliers or adapt your supply chain, then the cost of selling products will increase. - Impacted profit margins.
To absorb the increased cost of goods sold, you may feel it’s necessary to increase your prices and pass the costs onto your customers. Increased prices could result in fewer net sales. Equally, if you don’t pass on the costs, you will have to absorb the costs yourself, also impacting your profits. - To calculate the impact on your profit margins from changes to both sales and cost of goods sold, you can use the following formula:
Gross profit margin = (Net sales – COGS) / Net sales
You may also experience:
- Reduced consumer confidence.
When there is economic uncertainty that is heavily discussed in the news and on social media, consumer confidence inevitably stalls and as a result, so does spending.
- Supply chain disruption.
As a result of the new tariffs, it may be necessary to change your supply chain or begin sourcing materials or products from a different region. You may also suffer disruption as other countries respond to the tariffs. Evaluating and updating your supply chain takes your time and focus away from other activities and initiatives. Supply chain disruption can also result in negative customer experiences that impact brand loyalty.
Has anything like this happened before that we can learn from?
Yes. Consumer confidence has fallen considerably twice in recent history.
The first time was when the global pandemic began. The US Conference Board’s Consumer Confidence index dropped from 132.6 in Feb 2020 to 85.7 in April 2020. This was one of the fastest drops ever recorded as consumers panicked about jobs, health, the economy, and how long the pandemic would last.
However, on this occasion, ecommerce boomed (US ecommerce jumped 44% in 2020) due to the lockdowns and lack of physical retail, as consumers cautiously redirected their spending online and consumer confidence ticked back upwards relatively quickly.
The second time was when the US Federal Reserve began increasing interest rates in 2022 to curb inflation. This led to the Conference Board’s Consumer Confidence Index hitting lows of 95-100 in mid-2022, down from 128 in 2021.
This drop in consumer confidence also led to a slowdown in ecommerce growth. US ecommerce sales growth dropped from 18-20% YOY (2020-2021) to ~6.5% in 2022, and Amazon posted its first ever quarterly loss since 2015.
Confidence remained well below pre-pandemic levels all the way through 2023 – recovery took time.
What impact does a drop in consumer confidence have on Shopify stores?
There are multiple ways in which falling consumer confidence impacts your Shopify store:
- Discount-hunting: As prices increase and consumer confidence falls, cautious shoppers start to hunt for the lowest prices or swap the products they usually buy for cheaper alternatives. This can impact your returning customer rates, as well as increasing cart abandonment.
- Poor customer experiences: Unforeseen supply chain problems, issues getting hold of products and price increases can all leave customers feeling under-valued and frustrated.
- Subscriber churn: Customers who are worried about overspending are likely to re-evaluate their subscriptions, canceling any they feel are nice-to-have until the financial pressure has passed.
- Increased acquisition costs and lower ROAS: When brands anticipate a period of reduced consumer spend, they often increase their digital marketing budgets in an attempt to acquire enough new customers to offset the dip.
Looking back to the hike in interest rates in 2022, the Interactive Advertising Bureau saw internet advertising revenues in the US reach a record high of $225 billion in 2023 – a 7.3% year on year increase. As more Shopify stores increase their ad spend, competition increases. The return on that ad spend (ROAS) shrinks, acquiring new customers becomes more difficult and securing more second purchases from them becomes ever more important.
Is increasing prices the only response to the new tariffs?
As we’ve outlined above, both the additional costs and the drop in consumer confidence associated with the new tariffs may impact your profits. Many brands on Shopify will have no choice but to pass that impact on to the consumer by increasing prices. And in fact, 80% of Americans are expecting price rises following the implementation of new tariffs.
These price increases can leave even the most loyal customers feeling frustrated, and you could see them hunting for lower prices elsewhere. A survey from Mintel showed that 62% of US consumers say rising prices due to tariffs will make them reconsider loyalty to certain brands.
However, new research from LoyaltyLion has compared loyalty behaviors and engagement during periods of high and low consumer confidence, and found that engaged loyalty program members are a brand’s most valuable asset during times of economic uncertainty.
Redeeming loyalty program members are almost 3x more loyal when consumer confidence slumps. In a previous period of low consumer confidence, brands lost just 3% of revenue from redeeming loyalty program members, versus 8% from non-redeeming members, and 6% from non-members.
Additionally, during the same previous period of low consumer confidence, 88% of purchases made by redeeming loyalty program members were repeat purchases, compared to 50% among non-redeeming members and 22% among non-members.
Engaged – and especially redeeming loyalty program members – remain a more reliable source of revenue when consumer confidence decreases. The good news, is that Shopify stores are – on the whole – better equipped to retain loyal customers than they have been during past consumer confidence dips.
LoyaltyLion’s recent survey highlighted a considerable uptick in loyalty program adoption amongst Shopify stores. Of the 450 brands we surveyed, just 6% did not already have a loyalty program in place, or any plans to implement one. 65% were already investing in loyalty, and almost half of those that weren’t, expected to have implemented a program in the next 12 months.
Shopify stores who have shifted their focus to retention, even before the tariffs came into play, enter this period of economic uncertainty in a stronger position. Why? Because in times of turmoil, consumers look to brands for three key things:
- A strong value exchange that makes it worthwhile choosing your brand in spite of increased prices
- Clear communication around pricing, delivery times and stock that prevents customer frustration and churn
- Trust that you are doing everything you can to meet their needs
These are all things that a loyalty program can help you deliver more effectively.
If you are already investing in loyalty, what action should you take?
A loyalty program provides a vehicle for all three tenets highlighted above. There are also some specific ways you can deploy your program effectively to ensure your loyal customers continue shopping with you, even if their shopping habits slow down.
- Offer rewards that cost you little but mean a lot. If you have to pass on costs to your customers, balance that price increase with valuable rewards and perks that make the higher price feel worthwhile/prevent them from wanting to find the same thing at a lower price. Tiers can be extremely valuable in delivering experience-based rewards that cost you little to deliver, but make a real impact for your customers
- Help customers build loyalty point balances faster. Run regular double or bonus points promotions to help loyal customers get to a reward and buy that treat they’ve been saving for sooner.
- Use free product rewards to keep the treats coming in. Offer your loyal customers free sample-size product rewards that ensure they continue to get a treat even when they’re cutting back on spending. Make these seamless in the cart to reduce cart abandonment.
- Offer free shipping rewards to help conversion. Help cautious consumers continue to purchase by including free shipping as a loyalty program perk for loyal returning customers.
- Embrace preloved items into your inventory. Incorporate resale into your loyalty strategy – offer points and rewards on second-hand, preloved items as well as new ones to retain your customers even if they’re not willing to buy brand new.
- Communicate effectively with your customers. Integrate your help desk with your loyalty program so that if customers do face any supply chain disruption, you can award points or tier upgrades to win them back.
- Build trust with new and existing customers. Incentivize referrals and reviews to ensure that the consumers who are shopping and do find you convert at a higher rate and have increased confidence from the UGC they’ve consumed
- Keep customers coming in-store. Offer top-tier members the chance to attend events, product launches, styling sessions etc in-store. Encourage them to keep shopping with you to unlock these perks, and bring them in-store to buy and enjoy an experience they might have to pay for elsewhere.
If you’re not already investing in loyalty, why is now the time to start?
If you’re not already investing in loyalty, as our data highlights, now is the time to start – for a few key reasons.
As already discussed, acquisition costs often rise in terms of economic uncertainty, and ROAS is likely to drop. As such, it’s even more important to increase the lifetime value of the customers you’re acquiring. A loyalty program is the most effective way to secure second purchases and more.
Secondly, as our data shows, many of your competitors are already investing in loyalty or on the way to doing so. Once they have enrolled your potential shoppers into their program, it will be significantly harder to win them over to your brand.
And finally, when things are uncertain customers value trust and communication. A loyalty program opens doors to both of those things, offering you more opportunities to collect data to personalize messages, and communicate between purchases. This combination could help you protect your profit margins, and retain more customers, even if you do have to increase prices.
Looking for some advice on how to navigate tariffs? We’re here to help! Set up a time to talk with one of our team today.
