Don’t discount adding value

The cost-of-living crisis impacts everybody. The media will rightly focus on the most vulnerable – framed by the appalling ‘heating or eating’ choice. However, the rest of the population is also faced with deep cuts to their disposable income from rising mortgage payments, inflationary pressures on prices and the continuing high cost of fuel and energy. Everybody must make spending choices.

Brands too are faced with choices. Unlike a government that can spin debt out over decades to fund help to citizens, a commercial brand is right at the coal face. How to maintain income in a market of rising costs and reduced consumer ability (or willingness) to spend? It’s a classic double-bind. So how to react?

Choices on the face of it are relatively straightforward – limit price rises by absorbing supply-side cost increases, discount current pricing strategies, look to add value to the consumer purse or simply do nothing and go with it. We would never advise the latter, but the choice between using price or value as a tool to help customers and keep the business afloat is a difficult one. Inherent complexities mean choices are anything but straightforward.

How we make purchase decisions.

What we buy and why is a complex and fascinating topic. Broadly though think of us as having two selves – a rational self and an emotional self. Each one governed by different parts of our brain where an internal ‘negotiation’ is constantly going on between our left and right brains.

Broadly, this conversation is determined by what we are ‘negotiating’ over. Essential items – those necessary to sustain life – are a rational decision. We really don’t have a choice – heating, fuel and so on are largely undifferentiated products. So here we are highly priced and deal driven.

Goods and services that are non-essential are choices that trigger our emotions – the latest tech, fashion, cars, holidays, eating out – these are all things that make us happy. We therefore respond emotionally.

To discount is to ……?

So how does a brand approach a downturn and look at a pricing strategy that helps customers, retains customers (or minimises churn) and maintains income so future investment and innovation isn’t impacted too adversely?

In general, the more essential the items the less elastic is the demand – raise the price too out of whack with the market and demand disappears. The consumer isn’t willing or able to pay more. You see this today with the most vulnerable in our society. This also highlights the flipside of pricing – it directly affects customer relationships. And it affects them severely for many brands and sectors.

So, why price discount?

Pricing can be fickle and at times of crisis it can also get emotional – remember the Tesco and Marmite spat a few months ago? Here are a few reasons to discount:

·        Silver linings – this is more about price manipulation (within the law). Two equally priced, same spec, products. One is ‘discounted’ from a higher price, the other a regular price. We feel great about a discount. Result – discounted product wins out.

·        Drive sales and share – bit of an obvious reason, but a time-limited discount will drive sales. The FOMO effect and pulling forward consumption, stocking up or sales for no reason!

·        Fend off the competition – an aggressive competitor can have a great short-term impact on cash-flow

·        New product launches or accelerating the removal of old stock – either way a price cut can accelerate the entry or exit of a product into the market.

And why not?

·        Loss of customers – too aggressive and too often can impact customer relationships. In many cases it can defer a buying decision as there’s always a better deal around the corner right!?

·        Loss of brand value – perceived value can be damaged by customers believing their brand of choice has gone down market

·        Loss of trust – savvy shoppers increase in harder times. So, a ‘family pack’ saving that is more per 100g than a regular pack will erode trust.

·        Loss of margin – price-cutting is often a one-way street. Once done it’s done.

There are a host of other supply-side driven reasons that affect pricing strategy and tactics, however, for many there are other options.

Add value to add spending power

Consumers have a certain level of spend – their ‘purse’. If more is being taken on essential purchases, then less is available for the things that make us feel good. If you can add spending power to customers, you are directly helping them maintain their lifestyle and elevating the relationship above one of price alone. This is obviously a big positive and specific to each brand’s market sector and segment.

How to do this? In a word (ok, two!), promotional marketing. It has the power to:

·        give a helping hand to customers

·        maintain revenues

·        maintain margins

·        retain customers

A timely and relevant promotion will cost a lot less than a price cut. £1 of promotional value does not cost you £1. Though a £1 cut in price costs precisely that £1.

It’s never black and white though. We design high-performing, low-marginal cost promotions that help brands help their customers through tough times.

Give us a call if you want to add spending power to your customers.