In an age of high inflation, it can be difficult for brands to increase their prices but there are a number of options open to them, writes Jimmy Larsen.
The main challenge facing Irish households right now is high inflation, referred to as the cost-of-living crisis. This is being driven by increasing energy prices, with regular announcements of substantiated, continued price hikes. With no end in sight for the war in Ukraine and Russia limiting its gas supply to European countries, this is likely to continue, at least in the short to medium term.
According to a recent Gallup International/B&A survey on the war in Ukraine, inflation is the top concern of Irish and European citizens, with 86% of Europeans being concerned about price increases. This was even higher in Ireland where 92% are concerned. B&A’s monthly consumer confidence tracker has highlighted a significant decline in consumer confidence since the onset of the war in Ukraine, deflating confidence to pandemic levels.
The low level of consumer confidence is driven by the cost-of-living crisis and concerns about a possible recession, with the Irish economy otherwise performing well on a range of economic measures, e.g. low unemployment, high tax intake and the removal of COVID-19 public health restrictions. Annual inflation stood at 9.1% for August 2022 with almost all sectors showing significant price increases. Highest inflation is seen for utilities (21.6%) and transport (19.4%), sectors that are impacting all households and businesses in Ireland.
With the cost base increasing, businesses and marketeers across Ireland are struggling with higher operational costs and lower profitability. The obvious solution is for a business is to increase prices themselves, but how can this be done without compromising market share and brand equity, in an environment where customers are increasingly sensitive to price hikes?
Companies with a more “fixed” customer base, e.g. banks, utility companies, mobile networks and streaming services, could consider price differentiation tactics to implement price hikes without impacting share and brand. By offering a more suitable range of price plans, each with distinctive benefits and add-ons, these companies can increase prices for customers who are willing to pay more for additional benefits, while keeping a basic offering for those who are unwilling or not able to afford paying more.
The Nudge Effect
A behavioural economics and “Nudge” approach is particularly useful, when designing a price plan portfolio. A well-known, behavioural science experiment shows that most would choose a mid-range price plan, if this price plan is introduced as the default option and introduced with a more basic package and 1-2 more premium packages.
Understanding how consumers make choices for your sector and the value they place on various add-ons is key to designing a price plan portfolio that can protect both the customer base and the profitability of the business. Highlighting add-ons can also help leverage the brand, e.g. in terms of innovation, value for money and differentiation. Examples of add-ons could be no variable banking fees, faster network speeds, additional insurance cover, green energy and access to streaming services on multiple screens.
For FMCG brands, the challenge is even greater, with purchases being more discretionary and an increasing threat from private labels. How do FMCG brands increase prices to protect their profitability, without prompting consumers to buy more from other brands and private labels?
The key here is to understand the current strength of the brand, in the market overall but also across various segments. Stronger brands will have more head room for implementing price hikes, without affecting market share, than weaker brands. Furthermore, considerations need to be made in terms of how a price increase will be implemented. A number of options could be considered, e.g. an outright price increase, reducing the pack size, gradual price increases, a more diverse range of products at various prices, and the use of short term promotions to mitigate the impact of a price increase.
While a number of approaches can be used to establish the above, one of the best approaches would be a brand evaluation study combined with a conjoint trade-off analysis. In a conjoint study, respondents are exposed to a high number of statistically generated shopper scenarios, typically in the shape of a supermarket shelf with various brands, pack sizes, price points and promotions. Through the trade-off choices made, we can establish head room for a price increase, and the best approach for implementing a price increase, e.g. outright price hike, pack size reduction, range extension and short term promotions.
The conjoint approach will also facilitate the development of a preference share simulator where various scenarios can be explored further, including possible competitor reactions, or the business reducing their prices, if possible, to gain market share.
Conjoint is also a useful tool in determining optimal product range, impact of delisting less profitable products and impact of range extension/new product development.
B&A has worked with a range of sectors and clients in devising price strategies and tactics, using behavioural science, qualitative research and conjoint analysis. We recently helped a leading FMCG brand under threat from private label implement a price increase with a minimal impact on share, increasing the profitability of the business.
Jimmy Larsen is a board director, Behaviour & Attitudes (B&A)