At first, it sounds like a good thing: Americans are saving more, making frugality the center piece of spending decisions. As fears of the recession continue to mount, saving rates are in the up-swing with positive savings rates now being the norm rather than the exception. Economists now expect the personal savings rate to reach between 3% and 5% in 2009, a significant trend reversal from the last few years that saw the rate dip below zero as recently as 2005.

So why be so concerned now when Americans seem to have gotten the message of the wisdom of living within their means and have begun retrenching from the bankrupt philosophy of speculative and uncertain financial gains?

The answer lies in what economists call the “Paradox of Thrift” and timing has a lot to do with it.

·         Saving is a good decision both at the individual level and on the aggregate for the whole economy, as savings are the source of capital used to finance investments that help the economy grow.

·         However, for most Americans (except the very wealthy), savings and spending are two sides of the same coin. If we save more, we spend less; conversely, if we spend more, we save less.

·         If U.S. households are saving more, it follows therefore, they are spending less and this change is hurting small businesses, the source of job creation in the American economy.

A dollar saved is not a dollar spent. Given that consumer spending accounts for over 70% of our gross domestic product, today’s new found thrift fueled to a large extent by fear, seriously impairs the odds of a prompt economic recovery. If consumer spending does not pick-up, the economy will continue to suffer. 

Facing decreased demand for their products and services, the over 27.2 million small businesses who account for over 50% of US workers on payroll, continue to lay-off workers, put on hold expansion plans and reduce capital expenditures; a confluence of decisions that on the aggregate make things worse for the economy. This sequence of events contributes to a vicious-circle where economic uncertainty creates fear and  reinforces the need for increased savings which leads in turn to reductions in spending and so goes the cycle.

Recent steps by the Obama administration outlined in the Stimulus Package provide some relief to small businesses with improved access to credit, tax relief and updated incentives for capital investment. These fiscal and monetary measures, however, do not tackle the larger problem of how to improve consumer confidence and bring saving rates to a healthy balance without endangering our path to a prompt and sustainable economic recovery.

To achieve profitability in these uncertain times, it is critical for small business owners to continuously measure and assess the effectiveness of their marketing strategies and advertising budget across all communication channels: web, social marketing, direct mail, radio, TV, print media, etc.

This information-based strategy ensures an optimal allocation of marketing resources at each stage of the customer lifecycle: who to target, which customers to retain and which ones to grow in order to achieve profitable growth in good and challenging times alike.

Facing declining margins, increasing competition, tightening credit and thrifty consumers, experience and intuition do not by themselves ensure business success. To achieve profitability, these important skills need to be supplemented by the power of customer information: If you can’t measure it, you can’t manage it.