The decline in consumer purchasing power is a critical issue that can affect almost all aspects of the economy. Its impact can be felt through changes in consumer behavior, business sales, and even the national economic growth rate.
Simply put, purchasing power is the ability of an individual or an entity to buy goods and services with a certain amount of money. This condition can fluctuate, influenced by various factors. For business owners, understanding the causes and strategies to navigate declining purchasing power is crucial for businesses to survive and remain competitive amidst challenging economic situations.
What is Purchasing Power?
Purchasing power, or purchasing power, is the ability of a certain amount of money to acquire goods or services in the market. This concept reflects the real value of money in daily life. According to Investopedia, purchasing power can weaken or strengthen over time due to certain factors—one of which is inflation.
Empower states that the higher the price of goods, the fewer items can be bought with the same amount of money, thus decreasing purchasing power.
As an illustration, let’s look at the price of 2 liters of cooking oil in Indonesia. In 2020, the average price of cooking oil was around Rp 25,000.00. However, by 2025, the price of the same oil could reach Rp 45,000.00.
This means that if you could once take home 4 liters of cooking oil with Rp 50,000.00, now you can only get about 2 liters. This comparison shows how inflation erodes people’s purchasing power over time.
Factors Causing Declining Purchasing Power
The cooking oil example was merely a simple illustration. In reality, many interrelated factors influence people’s ability to buy goods and services. Below are some key factors that often lead to a decline in purchasing power.
1. Macroeconomic Conditions
The overall economic situation—ranging from unemployment rates, Gross Domestic Product (GDP) growth, to consumer confidence—plays a significant role in purchasing power.
When the economy grows steadily, job opportunities expand, and incomes rise, thus maintaining purchasing power. Conversely, when the economy weakens, many people reduce spending, and the effects are felt throughout the business chain.
2. Inflation
Inflation is the most tangible factor that weakens purchasing power. When the prices of goods and services rise faster than income increases, the same amount of money can only buy less.
For example, if inflation reaches 7% but income only rises by 3%, purchasing power automatically decreases. This is why business owners must always monitor inflation trends to adjust sales strategies and pricing.
3. Interest Rates
Interest rates affect the cost of borrowing as well as returns from savings or investments. High credit interest rates make people reluctant to borrow, which can lead to decreased consumption. Conversely, low savings interest rates can also make people lose interest in saving.
This condition directly impacts purchasing power, especially in sectors requiring significant financing, such as real estate.
4. Currency Exchange Rates
Fluctuations in the Rupiah exchange rate against foreign currencies can affect the prices of imported goods and raw materials. If the Rupiah weakens, production costs increase, and domestic goods prices also rise.
Even if consumers do not directly purchase imported goods, the impact is still felt in the final price of products sold in the market.
5. Income
The amount of household or individual income is clearly a primary determinant of purchasing power. However, an increase in income does not always mean increased spending capacity.
If salary increases are equivalent to the inflation rate, purchasing power essentially remains constant. However, what determines it is the difference between income growth and inflation.
6. Government Policies and Taxes
Fiscal policies such as taxes, subsidies, or social assistance directly impact public consumption.
High taxes reduce disposable income, while subsidies or tax incentives provide more room for consumption and investment. Therefore, appropriate policies can help maintain purchasing power.
7. Supply and Demand Dynamics
If demand for a staple good like food or fuel drastically increases while supply is limited, prices will rise.
Conversely, a balance between supply and demand helps keep prices stable, preventing purchasing power from eroding quickly.
8. Economic Growth and Stability
A healthy growing economy creates more job opportunities, increases wages, and strengthens consumer confidence.
Conversely, a recession or political instability can suppress household incomes, thereby weakening purchasing power.
9. Cost of Living
Rising costs of housing, education, or healthcare place significant pressure on household budgets.
Even if incomes remain stagnant or increase slightly, rising living costs can cause people to lose flexibility in spending on other goods, thus decreasing purchasing power.
Why Do Businesses Need to Pay Attention to Changes in Purchasing Power?
For business owners, consumer purchasing power is not merely an economic term but a tangible factor influencing sales, marketing strategies, and even business continuity. Here are some important reasons why business owners must pay attention to changes in purchasing power.
1. Purchasing Power Determines Consumption Patterns and Lifestyles
A decline in purchasing power means consumers can only buy less, even for basic necessities. This changes living standards and daily spending behavior, including allocations for non-essential products like entertainment and lifestyle. Businesses that fail to adjust their products or prices risk losing market share.
2. Impact on Relevance and Priorities
Concurrently with the decline in consumer purchasing power, consumption patterns can also shift as new needs emerge. For businesses, this situation serves as an important signal to adjust product strategies and offerings to remain relevant to current needs and evolving consumer spending priorities.
3. Implications for Business Strategy
Purchasing power also directly influences business decisions, both in expansion and working capital management. Inflation and rising credit interest rates can increase cost burdens, requiring companies to be cautious when making investment decisions. From a sales perspective, pricing strategies such as discounts, bundling, or economy packages become key to maintaining competitiveness among increasingly price-sensitive consumers.
How Can Businesses Respond to Declining Purchasing Power?
In economic conditions that lead to a decline in public purchasing power, business owners need to be more adaptive and strategic. It’s not enough just to survive; businesses must be able to adapt to changes in consumer behavior to remain relevant and competitive.
1. Increase Revenue and Efficiency
For businesses, maintaining purchasing power means striving to increase sales while simultaneously reducing operational costs. One way is to negotiate with suppliers to get lower prices. This step can help maintain healthy margins even if consumer purchasing power weakens.
2. Anticipate Changes in Demand
Consumers will be more selective when purchasing power declines. Therefore, businesses need to regularly monitor market trends and customer behavior to adjust product strategies. By understanding shifting spending patterns, companies can offer products that consumers truly need and remain relevant amidst economic changes.
3. Optimize Customer Experience
When spending money is limited, consumers become more sensitive to value and convenience. Businesses can address this by offering flexible payment options, economy packages, or services that simplify the shopping process. Reducing friction in the customer journey will increase the likelihood of transactions even if purchasing power declines.
4. Build Customer Loyalty
During difficult times, retaining existing customers is as important as acquiring new ones. Providing consistent service, guaranteed product quality, and leveraging positive reviews can strengthen trust. This loyalty will generate repeat purchases and beneficial word-of-mouth recommendations for the business.
5. Product and Business Model Innovation
A decline in purchasing power can be a moment for innovation. For example, launching more affordable product variants, offering bundles, or introducing additional services tailored to consumer needs. By continuously adapting and gathering customer feedback, businesses can maintain competitiveness even in a sluggish market.
The decline in consumer purchasing power is a real challenge that business owners must face amidst current economic dynamics. By understanding the causal factors, impacts, and strategies to address them, businesses can not only survive but also discover new opportunities.
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