Will Innovation And Price Transparency Stop Consumers Trading Down?

Nick Bull

The list of prices that are going up is endless right now. There’s energy, water, broadband, mortgages and that’s before you get to food and other essentials.

Our research illustrates how dramatically many consumers are changing their behaviour. A recent* Hall & Partners survey of 250 UK citizens aged 16+ found that more than a quarter were switching from their favourite brands to own label and nearly six in 10 had shifted from big name brands to cheaper value brands. More than 42% said they were less loyal to their favourite brands.

But while the cost-of-living crisis can be a struggle for many consumers and is putting household budgets under pressure, it’s also a difficult situation for brands to navigate.

A strong brand is an insurance policy for hard times

As marketers we know that a strong brand is an insurance policy for hard times. The more people that know what your brand stands for and value it, the less likely they are to shop around in the category or drop you from their consideration list.

Advanced analytical techniques allow us to evaluate how much brands can afford to adjust prices before it starts to affect revenues, sales and market share. Tools such as ‘discrete choice models’ provide a prediction window that helps guide decision making and tell us just how many price increases consumers are likely to take before they seek out alternative brands and/or private label options.

Price sensitivity is not just a question of income

Price sensitivity is a reflection of a wider range of factors including our upbringing (was money tight at home when we grew up?), our personal values (how much do we care about buying organic?) as well as our current financial situation and constraints.

There’s also the issue of social acceptability. Since the 2009 recession in the UK, it’s increasingly common to see many premium car brands in the car park at supermarkets like Aldi and Lidl. The better-off can now gain kudos from being smart by shopping at the German-owned discounters.

However, these issues play out differently in every category.

Let’s take the auto sector, for example. In recent years, premium car brands have done a great job in broadening access to their brands. They’ve done it by creating smaller models like Audi’s A1 and BMW’s 1 Series, but also by thinking about smarter ways to finance the purchase.

A new car may have a £30,000 list price but is also available for £300 a month and a small deposit, which may also include insurance, extended warranty, road tax and servicing, making premium car brands far more affordable for the masses.

The squeezed middle

The result of these marketing tactics is the mainstream middle has been squeezed as premium extends further down and brands like Kia, Hyundai and Kia continue to offer very desirable alternatives. Pincer attack in action!

This pattern is likely to continue, not least because auto is undergoing a once in a generation transformation - electrification.

Brands such as Kia, Hyundai and MG have come to the market with affordable EVs that are also eye-catching. While at the premium end, Tesla has just announced up to 20% drop in its prices (clearly upsetting those who recently bought at the higher price).

What we have then is a moment in time when potential car purchasers are already looking around and asking ‘what’s the best electric car for me?’ - and in a recession they are also looking more strongly at the right price too.

By offering more affordable electric cars, many car brands are driving themselves up the aspirational brand funnel, offering innovation as well as cheaper motoring.

Or we could look at another category such as food. Here rising costs are now being passed on and consumers are not happy. The impact can be seen in their weekly shop, with value options often most affected as there is less scope to absorb rising costs.

But it also affects premium options too. In the UK, Lurpak was one of the first brands to feel consumer wrath when a 500g tub of Denmark’s finest passed the £5 mark in some supermarkets. But other brands are also feeling the pinch. Global brands like Coca-Cola, PepsiCo and McDonald’s have all announced further prices increase this week.

There are no simple answers, of course, but when we think about rising prices there are two popular approaches to justifying them to consumers.

Innovation and transparency carry a premium price tag

First, there’s innovation. Consumers understand that when there’s something new and more distinctive about a product it can cost more. Kia’s new electric cars, for example, also come with the kudos of being the first in the neighbourhood to drive an electric car, rewarded in the UK with a green stripe on the numberplate.

Secondly there’s transparency. Everyone knows that the price of transport is going up and that employee costs are also rising. But brands that seek to put up prices need to be more transparent about why their prices are going up. FMCG brands are not always in complete control of this as retailers have a say too, but they could communicate just how much they are passing on and how much they are absorbing themselves.

There is a sense among many consumers that brands in a wide range of categories are using the current high inflation environment to raise prices for their commercial benefit and to increase profits. Many energy firms have been reporting soaring profits.

Being more transparent in marketing communications is one way to counter this feeling, especially as prices are still likely to keep going up over the next few months.

At Hall & Partners, we help brands connect with consumers across different touchpoints during the purchase journey and have advanced modelling tools to help you evaluate the impact of different pricing options. How far can prices be stretched? What do your consumers feel about it? What impact will it have on purchase and brand loyalty?

Click above to watch our recent 30-minute pricing webinar and learn how to accurately simulate and predict the impact of proposed price changes on your brand(s).

*Online consumer survey conducted w/c 20th February 2023

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