Editor's Note: Harvard Business School professor John Quelch writes a
blog on marketing issues, called Marketing Know: How, for Harvard
Business Online. It is reprinted on HBS Working Knowledge.
When driving these days, do you look at the prices every time you pass
a gas station? Do you notice yourself paying more attention to the
prices of everything you buy? You are not alone. Consumers everywhere
are more price aware. People who've been indifferent to price
increases for years are suddenly amazed at what things now cost. How
can marketers cope not just with inflation but with consumer sticker
shock?
1. Understand Your Customers. There are at least four ways in which
customers can respond to higher gas prices: downgrade from premium to
regular; take fewer trips by car, consolidate errands, switch to
public transportation; take the same number of trips but reduce the
miles driven per trip by, for example, vacationing closer to home;
drive more economically and less aggressively to improve miles per
gallon; and buy a specific dollar amount of gas rather than filling up
every time, even though this may mean more visits to the pump. Some
consumers may even trade in (at a loss) the SUV for a hybrid, an
example of how price inflation on one product can cause demand shifts
in a second, related, category.
More customers than usual will be looking out for price
promotions, but don't give away the store to those who don't need the
discount.
2. Invest in Market Research. You must discard your existing customer
segmentation assumptions and segment consumers around product usage
behavior and price sensitivity. You must get out into the marketplace
yourself and talk to consumers directly to understand their pain
points and how they are changing attitudes and behaviors in response
to price inflation. You must then quantify these shifts and develop
product and pricing strategies that balance the need to maintain both
profitability and market share.
3. Redefine Value. Customers buying soft drinks can think about price
in three ways: the absolute cost per can or bottle, the cost per
ounce, and, less common in this category, the monthly consumption
cost. Customers short on cash will focus much more on the absolute
price. They'll go for the 99 cent soft drink rather than the $1.29
container with 50 percent more volume. To motivate cash-poor
consumers, marketers must reverse engineer products and packaging to
hit key retail price points. This may mean downsizing package sizes,
something the candy industry always does in response to inflation.
4. Use Promotions. If you've always passed through raw material price
increases to the end consumer, you don't necessarily need to change
that policy. However, lagging competitors in passing on price
increases can have the same effect as a temporary price promotion.
More customers than usual will be looking out for price promotions,
but don't give away the store to those who don't need the discount,
and cut prices not across the board but only on items selected as your
inflation-busters. For cash poor consumers, these promotions should
hit the key price points on small pack sizes. For cash rich consumers,
encourage multi-unit purchases ahead of the inevitable next price
increase.
Strong brands can hold consumer loyalty while increasing retail
price points.
5. Unbundle. Customers who previously welcomed the convenience of
buying product, options, and services rolled into one may now ask for
a detailed price breakdown. Make it easy for your more price-sensitive
customers to better cherry-pick the options and services that they
truly need by giving them an unbundled menu of options.
6. Monitor Trade Terms. Beware of powerful distributors paying you
more slowly than they turn the inventory they buy from you. In an
inflationary environment, they're making money on the float by
stretching their payables. Manage your inventory on a last-in,
first-out basis to insure that increases in your realized selling
prices do not trail the increases in your input costs.
7. Increase Relevance. You need to persuade customers to cut back
their expenditures on other products, not on yours. In tough times,
consumers more than ever need and deserve the occasional treat. So, if
you are Haagen Dazs, tell the consumer to substitute private label
peas for the name brand but to not forego the comfort of curling up on
the sofa with a tub of her favorite ice cream. Strong brands can hold
consumer loyalty while increasing retail price points. Weaker brands
risk private label and generic substitution.
Clearly, not all marketers are equally affected by price inflation.
Commodities like gasoline, where the manufacturer adds little value
before the product reaches the end consumer, are more vulnerable,
while sales of the most exclusive global luxury brands hold up pretty
well regardless of price. Especially challenged are marketers of goods
and services for which consumers don't necessarily understand the
input costs: decorative candles, for example, are highly sensitive to
oil prices and the purchases are discretionary. The key here is to
educate the consumer, apologize for the uncontrollable price
increases, give price-sensitive consumers some promotional options,
and reemphasize product benefits.
![[DISCOUNT1]](http://si.wsj.net/public/resources/images/PJ-AY366_DISCOU_G_20101214175010.jpg)
Bryan Derballa for The Wall Street Journal
