Socio Economic Factors Affecting the Business and Industry

This lesson will focus on various socio economic impacts on the following sectors
such as consumers, suppliers and households.
--How do Socioeconomic Factors Affect Businesses?
Understanding the socio economic factors affecting business will help you make
better decisions about the future and direction of your business. To have an intimate
understanding, however, you will have to understand both external and
environmental factors, as well as how their interplay affects your business.
Socioeconomic factors are, therefore, the social and economic factors that shape
and determine the dynamics a society will experience. These are the factors that
affect the behavior of a particular group, also known as socioeconomic class.
Perhaps the most interesting behavior of member of a socioeconomic class is their
behavior as consumers. Different socioeconomic classes will generally have different
priorities, and this will affect how they spent their money.

Socio Economic Impact of Business- Consumers, Suppliers, and Households

Effect of Business on Consumers
A successful business influences the behavior of consumers to encourage them to
buy its products. The business does this by studying consumer needs and adopting
strategies to persuade as many consumers as possible that the products have value.
You can use several methods to influence consumers, and you have to know your
markets well to get the results you want.

1. Influence Consumers Emotionally

To affect consumers’ behavior, you have to communicate a message or present

consumers with information. Consumers’ are more likely to respond to material that
connects on an emotional level, and surprise combined with repeated episodes of joy
or humor is effective.
2. Encourage Customers to Look for Value
If you solve a common problem for consumers more effectively than your
competitors, or solve it at substantially lower cost, you can influence consumers to
switch to your brand. Your message emphasizes the higher value consumers get
when they solve their problem using your products. The key is to make sure your
products meet the expectations of consumers.
3. Offer Social Responsibility
To have a more general effect on consumer behavior is to offer ways of acting in a
socially responsible manner. You can promote your brand as environmentally green
and socially responsible, carrying out corresponding initiatives and informing your
target markets of your action. Consumers who want to buy from socially active and
environmentally responsible companies respond positively.
4. Change Behavior with Excellent Service
The level of service customers experience when dealing with your company can
have a profound effect on customer behavior. Customers who experience bad
service will not buy from your company again, and are more likely to share their
negative experiences with friends and online. Your customer service goal must be to
deliver flawless service every time a customer interacts with your business. The
effects on customer behavior result in a positive reputation for your company and
increased sales over the long term.
Factors that Impact Business and Consumer Confidence
With policymakers in the major economics working hard to restore and maintain
confidence levels and shifts in sentiment indicators playing a key role in risk
assessments of investors, it is worthwhile to consider the various influences on this
qualitative economic measure.
Several common factors that have the potential to cause marked shifts in sentiment
includes the following:
1. Changes in interest rates and/ or exchange rates, particularly if
they are rapid, large and unexpected;
2. Swings in the business cycle and associated movements in
employment/ unemployment levels and business investment
intentions;
3. Shifts in the relative prices of nondiscretionary goods and services,
notably petrol, healthcare, education and utilities prices;
4. Announced policy shifts in the stance of government fiscal policy
including large structural spending cuts or increases/ decreases in
taxation rates.

Selecting the Right Suppliers

It is important to select suppliers carefully as suppliers can affect the businesses they
provide goods to. If a supplier provides a poor quality product to a firm, it may affect
the firm’s reputation as the firm will need to use the goods or sell them onto their
customers. Similarly, if a supplier provides a slow or poor service, this may slow down
the service the business provides to its customers.
1. Supplier History and Reputation
2. Quality of the Product/Service provided by the Supplier
3. Price Charged by the Supplier and how does this impact on the quality of
the product/service provided by the supplier
4. Financial Strength.

Example: Does it have good cash flow and strong balance sheet?
5. Size of the Supplier and its other Customers.

Example: Does it normally deal with businesses of your size?

6. Capacity of the Supplier

Example: How much can the supplier comfortably provide and what is its
maximum?
7. Reliability of the Service
8. Flexibility of the Service
9. Turnaround Times
10. Payment Terms

Example: How quickly does the supplier expect payment and method of
payment?
11. Problem Resolution Process
Supplier Management
After agreeing a contract with a supplier it is important to monitor the supplier’s performance
to ensure that they are providing the service that was agreed with them. Some firms will agree
targets known as Key Performance Indicators (KPIs) that suppliers will need to meet.
Businesses are reliant on suppliers; suppliers provide the tools a business needs to operate.
If a firm manages to negotiate a favorable contract with the right supplier they are likely to
benefit. However, the wrong supplier or unfavorable supplier contract is likely to have a
detrimental effect. If things go wrong with a supplier it may take time to switch suppliers and
even if you do manage to switch suppliers quickly it could take time to recover from the
effects of a poor supplier.

Factors Affecting Household Spending

Household spending is the most important part of aggregate demand. It can be broken
down into a number of categories, covering major spending items such as transport, food,
fuel, holidays and clothing.
The pattern of spending changes over time as a result of changes in:
1. Household income – some goods are normal goods while others are
inferior, so increases in income encourage households to shift spending
from goods with a low income elasticity of demand, like food, to those with
high income elasticity of demand, like holidays.
2. Tastes and Fashions – over time spending on certain items that are ‘in
fashion’ increase relative to those that go out of fashion.
3. Taxes and Subsidies – as indirect taxes and subsidies rise and fall,
households will be encouraged or discouraged from spending.
4. Relative Prices – as the prices of certain goods and services rise in
relation to others, household spending will adjust.

Determinants of Spending
The level of spending is determined by a number of factors, including:
1. The current level of National Income

Some extra spending is induced by changes in the current level of national income.
As income rise, customers tend to increase their spending on higher income elastic
goods and services, such as luxuries, holidays and leisure goods. When income falls
households may postpone spending on these luxuries until income rise again.
2. The Level of Savings

Spending and saving are mutually exclusive, which means that if income is fixed, any
change in household’s savings will inversely affect spending. Many of determinants of
consumption have an inverse effect on saving.
3. Expectations

If households are confident, and have positive expectations about the future, current
spending can rise. This can lead to economic growth, and re – enforce the positive
expectations.
4. Unemployment

Unemployment has two potential effects on household spending. Firstly, the

unemployed spend less because of their lower personal income, and secondly,
unemployment causes negative expectations, even for those employed, and this can
act as a curb on spending and a stimulus to saving.
5. Rates of Income Tax
Changes in tax can clearly affect disposable, post – tax income, and hence affect
household spending.
6. Interest Rates

By altering the level of saving – a rise in interest rates will stimulate more saving, and
less spending.
By altering the cost of funding existing debts such as mortgages and bank loans. For
example, a rise in interest rates will divert household funds towards the higher loan
payments and away from general spending.
By altering the cost of new credit, and thus encouraging or discouraging household
borrowing. For example, a rise in interest rates will deter new borrows, who may
postpone borrowing until rate fall back.
By altering expectations and confidence. For example, rising interest rates will
subdue confidence and create a ‘wait and see’ attitude by households, who may
postpone certain spending until expectations improve.