Preserve profit margins and overcome the challenges of inflation through a consumer-centric, price-value optimization strategy.
In the current state of economic turbulence, business leaders are feeling the crunch. Costs are soaring along with inflation, impacting supply chains and slowing growth. Meanwhile, even the more wealthy consumer segments are feeling the pressure on their pockets and looking for more budget-friendly alternatives. This has caused a state of ‘stagflation,’ where businesses that maintain their current prices will see profit margins being eroded.
How can brands seek to maintain, let alone increase, their revenues and profit margins in this volatile and uncertain environment? Companies need to act now, as staying still will lead to an inevitable decline in profitability. The immediate temptation might be to re-balance the pricing mix based on a gut reaction, e.g., by increasing price levels to pass the company’s increased running costs on to the consumer, or attempting to drive increased sales volumes through aggressive discounting.
However, it isn’t that easy. History has shown that ‘broad brush’ tactics are not the best approach and can lead to long-lasting damage to both customer relationships and revenues. Instead, companies need to lean on their marketing teams to guide their pricing decisions, as marketers can bring the shopper’s perspective into the room through their understanding of consumers’ value perceptions.
Mastering the concept of consumer value allows marketers to think more strategically about pricing tactics to claim value through an optimized price-product architecture across the entire portfolio. This shift in focus will turn pricing into a super-power that drives both short-term revenues and long-term brand strength.
Here are four insights into the true power of value-based pricing that marketers can consider and act on to help preserve profit margins and overcome the challenges of stagflation.
1. Mastering value-based pricing starts with consumer focus
Finding the ideal price point means choosing a pricing approach for the company within the wider context of the economic environment. The most common pricing tactics that business leaders usually adopt include cost-plus pricing, competitive pricing and competitive pricing strategy, price skimming, penetration pricing and value-based pricing.
In these difficult times, value-based pricing is the only strategy that will allow businesses to recover their costs whilst remaining consumer-centric. Value pricing works by helping business claim the perceived value of their products that is currently hidden in the minds of consumers. As Publilius Syrus said in the first century B.C: “Everything is worth what its purchaser will pay for it” – and the same is true today.
Understanding the concept of value starts with empathy, i.e. viewing price from the consumer’s point of view. It is essential to find that pricing ‘sweet spot’ for products and ranges that brings the consumer’s ultimate perceptions of value in line with what they are willing to pay. This tension needs to be fully appreciated, since maintaining the balance is critical to both short and long-term sales. Brands that break consumer price limits now, with the aim of achieving short-term gains, risk damaging their brand’s performance in the longer term. Vice versa, a company that prices its products too low risks leaving money on the table and damaging the brand’s premium perceptions.
Keeping pace with ever-changing consumer preferences and buying behaviours through consumer research, is critical. And it is equally crucial to acknowledge that today’s consumer is not the same consumer companies were targeting a few years ago, before the Covid-19 pandemic, the Russia/Ukraine war and the cost-of-living crisis. Moreover, disruption is widespread and ongoing, from changes in preferred product features to using different distribution channels.
“For consumers forced to make trade-offs and potentially move away from their favorite brands to save money, it is essential for marketers to keep delivering on the basics of product, price, and trust, to drive sales volumes.”
-GfK Brand & Marketing Intelligence Head of Global Solutions Madalina Carstea
Recent GfK Brand Architect data confirm that meeting consumer needs is the core driver of Brand Choice, or how likely people are to purchase your brand over your competitors.
“To ensure your product delivers optimal value, you must therefore dissect and understand which parts of your price-product architecture mix meet consumers’ needs and ultimately drives their choice, as well as understanding what consumers think of your brand relative to the wider environment. This will tell you what to keep and what to change, to keep pace with consumers’ needs and stay relevant through the cost-of-living squeeze.”
-Madalina Carstea
Even when facing a crisis, brands need to maintain a consumer-centric strategy – i.e. identifying what shoppers want from their products and giving it to them at a price they are happy to pay for the value they’re getting – but also one which neither devalues the brand nor makes it unprofitable.
2. All consumer perspectives are not equal
When taking the temperature of the market from the consumer’s point of view, it is important to remember that ‘one size does not fit all’. A fundamental part of this exercise is understanding how each consumer segment has been specifically affected by inflation and the rising cost of living. This will be revealed through their sensitivity towards price; in other words, the proportion of drop in demand that results from a relative increase in price.
Brands need to use pricing with purpose. It is a tactic in the marketers’ toolbox that is used as a lever to implement a broader marketing strategy. Pricing can become a strategic super-power when it is used intentionally and purposefully to achieve a clearly-defined, consumer-led strategy. This sales strategy should be grounded in market diagnosis and segmentation, and be aimed at clearly defined target segment(s).
When brands have laser-focused clarity on who they are targeting, these segments can be prioritized to ensure they are not overlooked in market data. Marketers can gain these insights by understanding each segment’s price sensitivities and making sure they price accordingly to win choice and, ultimately, achieve their strategic objectives despite the volatile economic conditions.
If a target segment has a lower price sensitivity towards a particular product, the right approach would be to increase price within the consumer’s limit of tolerance, thus gaining higher profitability for the business without losing volume. With trust being one of the key drivers of Brand Choice, brands must make sure they stay within the limits of their product’s perceived value. Stepping beyond this glass ceiling will damage trust, which has taken time and investment to build.
On the other hand, if a target segment has a higher price sensitivity, price cannot be adjusted upwards without losing volumes and consumer trust. Discounting then becomes a temptation. However, this will have an adverse long-term impact on the brand as consumers’ perceived value for it will fade. As a result, some of the hard brand-building work put in over the years to create a sense of worth and forge an emotional connection with the target audience will be lost.
With the right insight and foresight, there is a better approach to the more price-sensitive segments. Through a firm understanding of the consumer’s value preferences, marketers can use this insight to adjust the product-price architecture, thus realigning the offer with what consumers are willing to pay.
This approach will signal to consumers that the brand is ready to meet them in their time of crisis, with a product that aligns with their wallets and still delivers in the areas that are important to them, i.e. a product that stays within the pricing ‘sweet spot’. It also enables consumers to be retained within the brand’s portfolio, from where it is easier to encourage product up-trading when the cost-of-living crisis is over.
3. Exploit the brand’s pricing power
Brand building strategy has a large part to play in making pricing into a super-power. This is because brand building has a silent but highly attractive long-term impact on pricing: it is proven to make consumers less sensitive to price increases. Generally, the lower a brand’s price sensitivity, the higher the premium a brand can charge compared to its competitors. Those companies that have built the strongest brands can not only charge these premium prices, they can also increase them without adversely impacting on demand.
“Reducing consumers’ brand price sensitivity is the most important lever to increase brand premium and pricing power. Brands that ask a price above the market average have a brand price elasticity that is almost three times lower than other brands.”
-GfK Head of Marketing Science Alexandra Chirilov
“Pricing power is also known as Brand Premium. It is an outcome of your brand building strategy – and it is what gives Power Brands like Pepsi, Apple, Microsoft, Starbucks and BMW their advantage despite the current economic crisis. The last decade of investment into these brands has paid off, with consumers willing to pay more for these products even when disposable incomes are squeezed.”
Building brand strength must be the marketer’s Holy Grail, as it means prices can be adjusted in line with inflation without impacting the brand’s perceived value – improving profit margins without significantly affecting penetration.
Instead of focusing solely on short-term promotions, marketers should therefore concentrate on promoting Brand Premium drivers such as differentiation, uniqueness and purpose, as shown earlier. This will reduce price sensitivity in the brand’s target audience, so sales will be maintained and revenues boosted when prices go up.
“Successful brand building brings additional value to consumers: ‘value beyond reason’. To deliver this extra value, brands have to go further and offer something unique, exclusive or tangibly different from the competition. They might also want to reinforce their own beliefs and values, and align these with their target audience, to further strengthen the brand. This all comes back to understanding consumers and learning more about what matters to them. In turn, this will help with framing price, by justifying the product’s value to the consumer both rationally and emotionally.”
-Madalina Carstea
4. Price is power when backed with consumer-value driven foresight
To overcome stagflation through the power of an optimized pricing strategy, marketers need access to accurate and high-quality data. The company’s own historical sales data, and competitor data, if available, are the logical places to start. The main drawback, of course, is that the market data is just that: it is historic, and influenced by many other factors which make it hard to isolate the price effect. It also excludes consumers’ value perceptions around the cost-of-living crisis. The recent series of financial events is unprecedented and the future is uncertain at best, so marketers do need to look beyond purely historic data.
Therefore, what is really needed is the ability to analyze and test shoppers’ likely reactions to different scenarios in a hypothetical environment where there is no financial risk, no impact on a product’s perceived value and no danger of potential new product innovations being exposed. How can this be done?
The answer is through conjoint pricing simulation models such as the GfK Consumer Price Lab. This online, always-accessible lab empowers you to optimize pricing across your portfolio to maximize revenues, predict consumer responses to price changes and pre-empt market reactions to competitor movements, all through simulated ‘virtual’ shopping scenarios. Armed with these data-driven foresights, you’ll have what you need to both create and claim value with the super-weapon of true strategic pricing.
With a winning combination of market-leading technology and global, category-specific expertise at our fingertips, GfK is perfectly placed to provide the support, guidance and advice that business leaders need to create and implement data-driven strategies for price optimization and brand growth.
We are here to partner with you in rethinking how you operate, so your company can successfully ride out the inflation crisis and continue to thrive in the longer term. To find out more, visit our GfK Consumer Pricing Lab page.
