Navigating Pricing to Avoid Pitchforks

Originally posted on MediaPost

Consumers can have short memories and adapt quickly to a new normal, but the grocery price increases of 2022 seem to have staying power in people’s minds. Outlining her economic policy, presidential nominee Kamala Harris promised a “first-ever federal ban” on price-gouging on food, insinuating that there were bad CPG actors. The message was received with cheers from her constituents, a reminder to marketers about how much consumers truly hate price increases on things they buy a lot and are very top of mind, like groceries.

The food price surge had multiple causes, including wacked-out supply chains and high input prices passed along to consumers. A McKinsey analysis revealed that even price increases covering 70% to 180% of cost of goods sold were insufficient for food and beauty CPG companies to maintain gross margins. The result was universal discontent.

Today, the situation is better.  Inflation is tempering, fallen to just 2.5% and within range of the Fed’s target.  After five years of rising food costs, consumers pay anywhere from 25% – 40% more than pre-pandemic for their baskets.  But they’ve mitigated grocery bills a bit by buying more private label and shopping sales. Food at home on the Consumer Price Index only increased about 1% this year.

Now that we’re in a more disinflationary period, what do marketers do about prices?

Consumers are signaling strongly that they will not accept price increases. For highly visible prices, this has always been partly true. For example, Netflix, despite investing and delivering value far beyond profitability, has incited nothing short of outrage, followed by a wave of reactionary cancellations, every time it raises prices.

There are a few strategies to help:

Segment for pricing models: AI enables perfect pricing models on volume and competition, and we’re moving into incorporating variables like consumer behavior. It’s becoming possible to calculate near-perfect willingness to pay. Bad for the mom who gathers supplies the night before school starts, good for margins.

Build trust. According to an Edelman Trust Barometer, just 53% of people globally trust companies headquartered in the U.S. This is down 9 points in the last 10 years. Holistic brand efforts are more important than ever. Patagonia isn’t sweating a wool price increase pass through.

Attract switchers: Switching and substitution has been high since the pandemic, which is bad news for brand loyalty, but good news for trial.

D2C margin capture: Direct contact with high-value customers improves margins. Expected growth in online shoppers exceeds 35% in categories such as over-the-counter medicine, groceries, household supplies and personal-care products.

The takeaway for marketers is a stark reminder that humans are not “econs.” Pricing can be emotional. The more visible the price, the stronger the reaction, and greater need for thoughtful strategies to add value.