What is Revenge Spending?
Revenge spending, also known as revenge buying, is used to characterize the incremental increase in consumer spending (versus normal levels) after an unprecedented adverse economic event (for example, the COVID-19 pandemic). In simpler terms, revenge spending is the urge to spend money to make up for lost time.
- Revenge spending characterizes the incremental increase in consumer spending after an unprecedented adverse economic event.
- Such type of spending is considered a contributor to stronger economic growth and inflation.
- Unsustainable revenge spending can cause long-term financial issues.
How Revenge Spending Works
Revenge spending is a phenomenon where consumers rush to spend more than they normally would on products and services, typically those that they feel they were deprived of during an adverse economic event.
Revenge spending is a contributor to stronger economic growth and inflation, as greater consumer spending, compared to normal levels, is a driver for greater demand for goods and services. The following steps outline how revenge spending typically occurs:
- An adverse economic event occurs, causing consumer spending to stall or decline;
- The household savings rate increases as consumers spend less; and
- After the adverse event passes and economic conditions stabilize, consumers, with an elevated amount of disposable income (due to having saved more money during the adverse event), rush to spend.
John is an avid traveler and has, for the past five years, budgeted $5,000 annually to travel the world. In 2020, due to the COVID-19 pandemic, John was unable to travel.
Question: Assuming the $5,000 budgeted annually for travel was not reallocated towards other goods or services, what comment can you make about John’s household savings rate during the pandemic?
Answer: John’s household savings rate should increase if the $5,000 that was originally allocated to be spent on travel is not reallocated during the pandemic.
Question: Is there potential for John to exhibit revenge spending if he is permitted to start traveling again in 2021?
Answer: There is potential for John to exhibit revenge spending by spending more than his normal budget on travel due to the additional $5,000 saved during the COVID-19 pandemic.
Real-Life Example: Revenge Spending in China
In the summer of 2020, when China was emerging from weeks of lockdowns, revenge spending significantly drove luxury brand sales.
For example, sales of Tiffany & Co. products surged 30% and 90% in April 2020 and May 2020, respectively, compared to the same months in the previous year. Burberry also indicated that “sales of its clothing, bags, and accessories in China were already ahead of the prior year, and continuing to show an improving trend.”
The Impact of Revenge Spending on the Consumer
Although revenge spending can improve consumer satisfaction in the short term to make up for lost opportunities during an adverse economic event, it is important not to revenge spending all the savings made.
Revenge spending that is more than sustainable can cause long-term financial issues. Before considering revenge spending, it is important to first reflect on paying off any outstanding debt and establishing an adequate emergency savings fund.
Identifying Revenge Spending in Data
An Ipsos poll published In July 2021 shows that one-third of Canadians plan to spend more than normal, as pent-up pandemic spending finds outlets. This type of spending is a textbook description of revenge spending.
Thank you for reading CFI’s guide to Revenge Spending. To continue your development as a world-class financial analyst, these additional resources will be helpful: