Insight May 29, 2009, 1:06PM EST

How to Keep Customers Buying

New research from McKinsey tags the ways consumers are changing their behavior during the recession. Here's how companies can respond

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European consumers, like their counterparts elsewhere, are slashing spending in the face of economic pressures and searching vigorously for value in the purchases they are making. This is creating a hostile climate for businesses serving the European market—and signs are that an even deeper, perhaps unprecedented, consumer retrenchment could be in the making. How can companies respond to such an onslaught?

Knowing one's customer is always a vital component of business, but never more so than in a recession, when spending patterns lurch dramatically away from normal trends and become tricky even for the savviest businesses to read. Finding out which product categories consumers are likely to target as they close their wallets is a vital part of market intelligence. Another is to understand the tactics consumers use as they try to cope with the assault on their spending power.

Europe's consumers are employing five key tactics, according to new research from McKinsey Global Institute and McKinsey's Consumer & Shopper Insights group. Which ones they use vary from market to market—something businesses need to understand if they hope to overcome consumer pullback.

1. Setting Limits

By far the most popular approach used by consumers is simply to control their spending. Some 69% of those surveyed by McKinsey in December 2008 say they are setting and sticking to personal budgets and devising new rules to help them limit their expenditures, such as avoiding large stores or paying only with cash rather than with credit cards.

To deal with this shift in consumer behavior, companies should help customers work within their new limits. (Better that than have customers abandon consumption altogether.) Retailers, for instance, can display budget or value items more prominently. Telecom providers can help spending-conscious customers by offering larger arrays of fixed-rate plans or prepaid cards. Sellers of expensive goods can expand leasing programs or offer enhanced warranties to underscore long-term purchase value.

In the U.S., Sears Roebuck (SHLD) has revived a simple solution to help consumers better manage their expenses: the classic layaway plan, which lets customers have merchandise set aside until they finish paying for it in installments. It's an old-fashioned alternative to credit cards or paying in full up front. The company's Kmart unit signed up 1.4 million new layaway customers last year—and noted at its annual meeting that many of them bought additional merchandise when they visited stores to make their biweekly layaway payments

2. Buying Only As Needed

The second tactic consumers use to curtail spending is to replace items only when needed. Many say they are prepared to delay new purchases, continue using products they already own for longer, or buy second-hand. This tactic is especially prevalent in the case of big-ticket items such as cars, electronics, and furniture. When it comes to so-called fast-moving goods (which are consumed and replaced quickly), consumers can't put off buying them altogether, so they are focusing instead on avoiding waste. From food and drink to cleaning supplies and medication, consumers say they want to buy only the quantity they need.

Companies can have a variety of potential responses. Makers of consumer products can introduce smaller packages to minimize waste. Coca-Cola (KO), for instance, has recently introduced a 20% smaller bottle at a lower price. Durable-goods makers faced with slower replacement cycles can offer product accessories or enhancements that stretch the life of a product. And to assuage consumer concerns over large investments, companies can experiment with innovative support or warranty options.