Sam Sturgeon: Three Strategies to Protect Brands During a Cost of Living Crisis
Inflation in the UK soared to 9%, with a forecast of 10%, resulting in a 40-year high mainly due to escalating costs for energy, food, transport and conflict underway in Ukraine.
As business costs rise, most businesses will need to raise prices to stay profitable – assuming they haven’t already. As a result, millions of low-income families are feeling the effects of the cost of living crisis.
The current situation differs from previous cycles of high inflation for two main reasons. First, most working adults in the UK have never experienced this level of price increases. Second, this period of high inflation comes after two years of collective sacrifice and hardship in the wake of the global COVID-19 pandemic.
Many consumers now worry that purchases they have been putting off, such as vacations, concerts and family outings, will now never happen. In this environment, price optimizations become a critical aspect of any business strategy and must be conducted in a way that does not negatively affect the brand.
Brands that are seen as empathetic to consumers’ price fears – and positioned to weather the inflationary storm with consumers instead of using the global crisis to overburden them – will be far more likely to thrive. Through strategic pricing, brands can be seen to be both responsible and responsive to consumer needs. On the other hand, price increases that seem merely reactionary or opportunistic are like adding to consumers’ fears and disappointments about their ability to “get back to normal”.
For companies that are forced to raise prices, there are three important ways to do so strategically without eroding brand value.
1/ Knowledge of price elasticities – Not just for the category but for your individual brand
Understanding individual price elasticities in a high inflation environment will be key to maintaining market share and optimizing pricing strategies. Most brands will be able to accurately calculate how much they will need to raise their prices to generate revenue. However, these calculations must be tied to what the market will support today. Although highly desirable brands are likely to be able to handle price increases better than other brands, the price premium a brand can demand is likely to be lower in times of high inflation.
2/ Know your customers – Which segments will accept price changes, and why?
Some buyer segments will tolerate price increases better than others. For example, high-end buyers of luxury brands are generally the most insulated from price shocks, and buyers with a strong emotional attachment to a brand may be more drawn to it during times of uncertainty as a means of maintain a sense of normalcy. However, in the first case consumers may be in a state of purchase and peace of mind in the second – both of which can be difficult to gauge accurately.
3/ Communicate effectively about price changes – Be open with consumers about the reasons for price increases
Rising transportation costs and labor shortages are contributing to higher prices that consumers won’t hold brands accountable for. Just as consumers want to support brands that they believe are making the world a better place, they will be more likely to support those that they believe are trying to minimize the impact of rising global prices rather than contributing to it. Communicating that “we’re in this together” or that you’re hoping price increases are only temporary can go a long way in building empathy and trust.
Sam Sturgeon is Head of Marketing Science at Hall & Partners.