What is Consumer Confidence and Why Does it Matter for your DTC Business?

A long, long time ago — in a world before the Internet — economists had a stunning realization: If consumers felt good about their financial situation, they would buy more; if they felt worse about their finances, they would buy less.

Determined to quantify this property, the top economic minds of the 1960s created the Consumer Confidence Index (CCI), a survey that puts a number to cumulative consumer sentiment in the United States.

We’ll be honest — we didn’t pay much attention to the CCI until summer of 2022, when we observed two things simultaneously:

1. Our brands saw an aggregate -6.12% drop in Marketing Efficiency Rating (total revenue/total ad spend) in the trailing 12 months
2. Gas prices hit all-time highs in June 2022 (source: AAA)

With talk of inflation and recession dominating the news cycle, gas prices were clearly just part of the story.

Since direct-to-consumer gas isn’t a thing (yet?), we looked at other CPIs more applicable to ecommerce:

While food prices painted a more-relevant picture than gas prices, we ultimately wanted a general reading of consumer spending in the economy.

And that led us to the Consumer Confidence Index.

One thing was clear: The Consumer Confidence Index hit a low point in June ‘22 … and that coincided with our brands’ worst struggles.

But consumer confidence wasn’t just bad that summer; it was the lowest Consumer Confidence Index ever reported.

And then July was even worse.

In fact, June and July 2022 held the worst confidence score in the 60-year history of the CCI.

So consumers were historically un-confident, and ecommerce efficiency was declining. These felt related, but were they correlated?

The answer was a clear “yes.”

CCI and MER are correlated with a coefficient of 0.888 on a scale of -1 to 1; in plain English, this means the CCI and MER move in proportion to one another.

This makes a lot of sense: if consumers are less confident, it takes more ad spend to convince them to purchase the same products.

Furthermore, this relationship goes deeper than the aggregate level — a number of individual brands have a strong linear correlation between MER and CCI.

For instance, this home goods brand:

Some brands even exhibited a clear correlation between CCI and Acquisition Marketing Efficiency Ratio (aMER), which measures New Customer Revenue / Ad Spend:

Those brands exhibited an even closer tie between CCI and their ability to attract new customers.

This learning is incredibly valuable in understanding how a brand is impacted by consumer sentiment. We’ve even used this lagging indicator as part of a model to predict Customer Acquisition Cost.

While Consumer Confidence is a useful metric, don’t throw everything else away just yet.

Consumer Confidence has 4 Drawbacks

1. It’s Lagging

Consumer Confidence is reported by OECD on the 2nd Monday in the month after: January’s Consumer Confidence was reported on Monday, February 13th. That tells us a lot about what happened in the last month, but doesn’t give much information about what is happening this month or in the future.

Sure, the Consumer Confidence Index does ask questions about the future of spending to formulate that model, but we found that the correlation starts declining after the month of the survey.

If we are asking consumers about their spending in October, but not reporting until mid November, that number just tells us more about what happened in the past and less about what’s going to happen in the future.

2. It’s Unreliable

Survey data is unreliable (people’s perception of their own behavior isn’t always accurate), and the CCI isn’t calibrated to any objective metric. This means there is no validation of the collective consumer’s actual behavior vs. what they said they would do.

That said, the Consumer Confidence Index, when averaged into full year cohorts, has a decent correlation of 0.568 to GDP Growth year-over-year. This is the best correlation we found from CCI to general economic metrics over a long period of time.

3. It’s Not Specific to Ecommerce

The Consumer Confidence Index isn’t specific to ecommerce.

Remember those charts from earlier in the article with CCI correlating to MER and CAC?

There’s a reason we began those charts in September 2020 at the earliest:

Ecommerce MER diverged from CCI from March to September of 2020.

Consumer confidence and ecommerce MER became disconnected because of the pandemic — when everyone was staying at home, ecommerce saw a massive increase in sales while the rest of the economy foundered.

Though ecommerce often rises and falls with the overall economy, it diverges when people can’t leave their homes.

4. It Can’t Show Consumer Sentiment About YOUR Brand

Lastly, CCI can’t show you consumer sentiment about YOUR brand. A customer’s good feeling about their own financial situation doesn’t mean they feel good about using their money on your product.

The Consumer Confidence Index for Your Ecommerce DTC Business

The Consumer Confidence Index was born at a slower time, when managing a survey meant calling 5,000 people per month and tabulating their responses by hand.

We live in a different age, where real-time results can be garnered much faster and from a much larger data set.

It’s clear, however, that tracking consumer confidence is incredibly valuable …

Which is why we’re developing our own Consumer Confidence Index; a tool that addresses the four drawbacks above, and gives immediate results specific to ecommerce metrics.

Subscribe to our weekly newsletter for more details on how we’re rolling that out. 👇