Towards the end of last year, my family decided it was time to move house. With two kids under 3 who’d lived most of their lives within our shared-block unit and the surrounding five kilometres, it was time for more space. Just as we signed the agent contracts, we heard news of interest rates increasing in the near future. We also noticed the amount the bank would pre-approve us for decreased with each meeting. Thankfully, we had done our research and budgeted for interest rate increases as we
made our purchase – although I’ll admit we didn’t quite expect the increases to hit so quickly.
What we didn’t plan for was all the other ‘cost of living’ increases that are now affecting consumers. Food, power, fuel, childcare – all these essential costs have also increased. The latest Consumer Price Index figures from the Australian Bureau of Statistics show prices up 6.1 per cent on last year; compare that with pre-pandemic, when the peak growth only once reached more than 3 per cent. For my family, one of those increases came in the form of the dreaded ‘fees increasing’ email from our new childcare. By itself, the $7.50-a-day increase per child is relatively manageable. Yet when every other cost is increasing, the impact is compounded. Making your coffee at home only goes so far, particularly when you’ve already been doing that to account for other increased costs.
We are far from the only family dealing with these challenges. New research released by Lightspeed suggests 95 per cent of Australian consumers are concerned about increased costs, and 82 per cent have already made changes to their spending. These shifts don’t seem to have been reflected in retail trade figures yet, but simple maths suggests that as budgets get stretched, less is available for discretionary expenses like retail and cafes. At the very least, consumers are increasingly having to weigh up the cost of purchases – or perhaps turn to ‘buy now, pay later’ services, which hold their own risks and trade-offs. In other words, consumers are having to consider what they really value. As costs increase, do they value their purchasing habits and preferred brands enough to keep spending, or do they value having more money leftover at the end of each month?
This brings us to a nuanced but important distinction between value, and price. On the surface, the terms may seem synonymous, but in fact they hold quite different meanings. These differences also lead to ways retailers might maintain the value of their products, even as prices increase. I’ll elaborate on the theory behind value and price as distinct concepts, and then provide links to possible examples below.
Value vs price
The concept of price is pretty straightforward, even if pricing strategies can get quite complex. Price is the amount of money a customer needs to pay to obtain a product or service. In other words, it’s the number on the product tag in store or just above the Buy Now button on the website, and it’s the $199.95 I paid for new sneakers so I could tell people (my wife) they were under 200. That is price – the financial outlay of a transaction.
Value is more holistic. It encompasses the trade-offs between what a customer receives (the benefits) relative to what is given up (the costs). The important part of this definition is that price is only one of the costs. Other costs include time and effort (how hard it was to buy or use), opportunity costs (missing out on something else), psychological and emotional costs (stress or anxiety from purchasing or using the product), and so on. Consumers compare these costs with the benefits they receive; when benefits outweigh costs we perceive good value, and vice versa. Like costs, there are multiple types of benefits; product (what the thing actually does), service (additional services with purchase), experience (how the product or purchase makes us feel), social (status or esteem benefits), and so on.
Just as consumers are facing rising costs of living, manufacturers and retailers are facing increased costs of doing business. This puts brands in the unenviable position of having to decide whether to take on these costs themselves or pass them on to consumers. Woolworths is attempting the former, notably announcing a recent prize freeze on hundreds of commonly purchased items. Of course, this strategy creates its own challenges for product margins, and may not be feasible for many brands still struggling to recover from the pandemic. So, while we may want to avoid it – particularly in the current market – the decision might have to be made to increase product prices.
Yet, if we now accept that value is much more holistic than price, and encompasses multiple types of benefits weighed against multiple types of costs, then we see that brands might be able to maintain value even in the face of rising prices. Remember, price is just one part of one half of the value equation. Looking at the whole equation again (value = benefits – costs) we see two possible ways brands might be able to maintain value, even if they have to increase prices.
Adding benefits
Remember that value is about benefits relative to the costs. So, as the financial costs to consumers increase, it might be possible to balance the scale, at least partially, by adding other benefits to your product or service. Remember how our childcare increased the daily costs? Coincidentally, or perhaps not, at the same time it started offering parents a free coffee and mini muffin at dropoff. Now, I could buy a coffee myself for less than the $15 extra it is costing us to send two kids to childcare – yes even in Melbourne – but for a tired parent in need of caffeine it’s a nice perk. So while it doesn’t completely offset the increased price, it has helped maintain a sense of value for the service.
This free coffee is an example of adding extra benefits to maintain value while increasing prices. A key thing to consider here is that the cost to the company in this example isn’t too high – they already had a kitchen and a coffee machine and were baking food for the kids. Are there extra benefits you could provide to your customers as your prices increase? Remember that benefits don’t just include products or services, they can be emotional, social, service, experiential and more. Even something as simple as a handwritten note or instructional video could add a level of personalisation or experience that helps consumers still see value in higher-priced products.
Reducing non-price costs
If other benefits can’t easily be added, or perhaps even if they can, the other option for brands is to investigate ways to reduce the other costs associated with a product or service. Remember that while price is a major factor, other costs include time, effort, stress or anxiety and so on. Are there ways you could decrease these other costs for consumers? For instance, as you raise prices, could you streamline the ordering or purchase process so at least the effort and time involved is reduced? Alternatively, could you add a transparent comparison tool that shows customers even as they pay a higher price they are still getting a comparatively good deal, thereby reducing anxiety from the purchase? Reducing these other costs could go a long way toward maintaining perceptions of value even as prices increase.
Final thought
Rising costs have created major challenges for both consumers and brands. Admittedly, some of the strategies proposed here are imperfect solutions to a broader issue. Yet they still hold an important message for brands. While raising prices due to inflation may be unavoidable, it is important to recognise how this will affect the perception consumers have of the value of your product or services. Raising prices with no consideration of other costs or benefits could have a damaging impact on how your brand stacks up against competitors. At the same time, thinking creatively about how to add benefits or reduce other costs, even in ways that don’t require substantial investments, could just make all the difference as consumers try to balance their budgets without missing out on the products and services they love.
This story first appeared in the November 2022 issue of Inside Retail Magazine.