When we conducted our 2nd Annual Economic Survey of businesses in Northern Central Ohio, 34.1% of respondents identified inflation as the single greatest threat to their companies. Not only were the rising costs of goods and services expected to pose a challenge to growth, but rising production costs were seen as a concern as well.
As we mentioned previously, inflation is a double-edged sword: Higher prices for raw materials, salaries, rent, utilities, and more mean production costs are also rising. And with the rising rate environment, borrowing becomes less affordable, a challenge for businesses that require additional financing to manage their cashflows. And because many businesses have exhausted their cost-cutting options during the height of the pandemic, adjusting their prices may be the only remaining tool in their tool belt. Of course, there may be consequences to raising costs – higher prices could discourage customers from buying and lower demand, while not raising prices could further shrink profit margins.
So where does that leave businesses? And how ARE customers reacting to rising prices?
PRICES ARE GOING UP; SPENDING IS GOING DOWN.
Many customers are reducing their spending, and price shopping is one way to do this. According to a 2023 survey of Consumer Buying Behavior by Intelligence Node, 95% of consumers check and compare prices of products online while they’re browsing in the store, and over 50% of consumers check online pricing very often or even every time they’re shopping in stores.1
As prices continue to rise, consumers change their behaviors as a result, and price becomes a bigger driving factor in household purchasing decisions.2
A recent study by Circana discovered that 57% of respondents stated their households were making sacrifices to make ends meet, and nearly 80% would be opting to purchase more lower-cost brands in the next six months.3 For consumers being mindful of their spending, there are a variety of lower-cost options available from private label grocery products to budget-friendly fast fashion. In the face of rising prices and thoughtfulness about spending, many of these lower priced brands are seeing growth. The fast fashion market was predicted to grow 15.6% in 2023.4
CUSTOMERS WILL SPEND MONEY ON THINGS THEY VALUE.
While consumers might be price sensitive, research shows they’re not necessarily always looking for the cheapest option. In fact, if a product offers a perceived value to the customer, they’re willing to spend the money.5 Businesses should be sure to communicate the value of their products and services and find ways to add additional value to their offering.
SOMETIMES, PRICE DOESN’T MATTER
Oddly, some studies show that consumer behavior DOESN’T change with rising prices. Though forecasters anticipate that consumers will dial back their spending, in some instances, consumers have done little to change their buying behaviors as prices have gone up. For example, the price of food has increased by nearly 10% from February 2022, yet consumers continue to buy the same brands and products.6 A 2023 study estimates that consumers become less price-sensitive over time. The researchers studied markups in consumer products from 2006 to 2019. Companies were found to have continually increased the cost of their products over time, however the consumers continued to buy the same goods.7
WHAT CAN BUSINESSES DO?
Know your product’s value and how it sits in the mind of your customer, then carefully develop a pricing strategy that’s right for your business – and be willing to adjust. While production costs and competitor pricing are important, you’ll have to think beyond number crunching alone. Perceived value, spending options and your ability to adapt to the changing environment are additional considerations to keep in mind when developing your pricing strategy.
There are a variety of pricing methods available beyond cost-based and value-based pricing. This article from The Harvard Business Review is a classic and provides a few to consider when developing your overall strategy. https://hbr. org/2010/05/how-to-stop-customers-fixating-on-price
Implementing flexible payment options is another strategy to consider to help customers feel more comfortable spending money on your products or services. For example, Buy Now Pay Later (BNPL) usage has been on the rise as customers look for ways to stretch their money in the face of inflation and price sensitivity.8 Consider options that give customers increased ways to purchase what they want.
CHANGE THE CONVERSATION
When the consumer begins to place more emphasis on price over other factors, it benefits companies to find ways to emphasize ways in which their product or service delivers value to the customer beyond its cost. Here are eight ideas to consider:
- Improve the buying process.
Many consumers value convenience much more than a lower price.
- Invest in your brand.
By communicating the benefits of your product over others you can begin to establish its value beyond its price and set yourself apart from competitors.
- Create a positive buying experience.
Online or in-store, consumers respond to an efficient, friendly, convenient way to buy.
- Stress value over price.
Goodyear tires, for example, began pricing their tires based on the mileage they were designed to achieve. Immediately, consumers could evaluate the value of the product for the price they were prepared to pay.
- Add distinctive design features to differentiate your product.
Ikea was a proponent of this strategy, offering customers ways to mix-and-match different parts of their furniture to create unique looks.
- Collect customer feedback.
Sometimes, asking customers what they really want from a product will provide insights into how you can sell its benefits. Even ask customers what they would pay more for. Years ago, Virgin Airlines discovered that customers found getting to the airport to be the most unpleasant and stressful part of international travel. To differentiate themselves, Virgin provided customers free limo service to and from the airport.
- Examine your marketing strategy.
Perhaps different segments of customers will respond differently to pricing because they value different things.
- Reward customer loyalty.
Instead of giving discounts or preferred pricing to attract new customers, reward your current customers to keep their business longer.
- With pricing playing such a crucial role in consumer spending, it’s critical you take the time to select and test the approach that is most appropriate for your product or service. Remember, adaptation is key, so if customers are not responding favorably, it may be time to reconsider your strategy and adjust accordingly.
7. https://alexandermackay.org/files/Rising%20Markups%20and%20 the%20Role%20of%20Consumer%20Preferences.pdf