Hot inflation numbers and energy instability are the latest signs that a deep economic chill will set in across major markets in North America and Europe. A look at the recent headlines reveals that the word “uncertainty” may be inadequate to describe what is happening right now and, even worse, what the winter will bring. This leads us to pose two vital questions: what can your customers still afford, and what can you still afford to offer them?
Inflation remains persistently high in the United States, where a decline in petrol prices in August is masking a larger-than-expected rise in the core inflation rate. Earlier this summer, the University of Michigan index of consumer sentiment hit a 70-year low before rebounding slightly. Nonetheless, University of Michigan economist Joanne Hsu said that “[t]here is a long way to go before consumers feel truly confident about the state of their personal finances and their outlook for the economy.”
Europe’s situation looks gloomier. Goldman Sachs has forecast that inflation will exceed 20% this winter in the UK as energy shortages wreak havoc. Other European governments, notably Germany’s, are already making provisions for blackouts and gas rationing in the fall and winter after Russia cut off gas exports to Europe via the Nord Stream pipeline.
A comprehensive report in the German newsmagazine Spiegel asserted that the country no longer faces the question of whether a crisis is coming, but “how bad it will be and how long it will last.” The first domino in what may become a cascade of bankruptcies has already tumbled there. The consumer goods company Hakle, a mid-sized toilet paper manufacturer, declared bankruptcy in early September after almost 100 years in business.
Is it worth placing huge bets based solely on these headlines? No, it isn’t. We encourage companies to place bets based on what their individual customers think. And that may be much more diverse and compelling than you might imagine.
But if the trends in those headlines do continue, success and survival will soon become synonyms. That heightened risk puts a premium on consumer insights as the best way to navigate the crisis. Market research will need to undertake a new mission as summer ends and cooler weather sets in the northern hemisphere. It will need to explore the fears and worries of consumers and use those insights to help companies answer two questions: what can consumers still afford, and what can you afford to offer them?
Worries and fears are changing what “value” means to customers
The meaning of value has always been ambiguous. In one sense, value is the absolute surplus that a customer gets from a product or service. It represents the extent to which an offer fulfills a consumer’s wants and needs. The idea behind value-based pricing is to understand and measure value, and then capture it profitably. Companies are leaving money on the table if they don’t.
Yet in another sense, value means “value for money” or relative benefit, which reflects how well a product or service fits to the consumer’s wallet. The salient question in the consumer’s mind shifts away from “what’s it worth?” to “is it worth it?”
That second definition of value becomes more relevant at a time when fears and worries are replacing wants and needs as the primary drivers of how consumers perceive value. It’s time for companies to find out what value means to their consumers, not only at this moment but within the context of scenarios that may plausibly occur in the next 6-12 months.
What tradeoffs will customers make as they tighten their belts and try to make ends meet? Barring extreme or catastrophic outcomes, consumers will always find ways to make ends meet, one way or another. They will postpone major purchases and rearrange their shopping baskets by trading down, forgoing certain “extras”, or changing their behaviors.
Your own course of action in the autumn and winter will depend on what your customers are experiencing. The more that the economic uncertainty increases, the more your consumers will take a keener look at the value that your offerings provide. What will you do if a growing number of your consumers decide that your product or service no longer represents good value? Conversely, how can you anticipate a positive effect, as consumers trade down, trade across, or get creative and perhaps find your offerings more attractive than ever?
Your own fine line between success and survival will depend on how well you help consumers with their decisions – with the right offerings, the right prices, and the right incentives.
It’s time to make your “whether forecasts”
The symbiotic balance between a company and its customers is never more in flux than in a crisis. Your customers need value they can afford. You need customers that can afford the value that you can afford to produce.
If a lower-case doomsday scenario unfolds this winter, you will want to have some responses prepared that go beyond the option of raising prices once again and leaving everything else unchanged. Price increases may already be reaching their limits in some sectors, as the recent battle between Coca-Cola and the German grocery chain Edeka demonstrates.
Let’s start the process with one plausible scenario, namely, that inflation hits double digits in continental Europe and tops 20% in the UK by January 2023. Rolling blackouts and fuel rationing have become part of day-to-day life. If we asked you to complete these two sentences, what would you say?
- “We need to know whether our customer will ….”
- “We need to know whether our competitors will …”
The way that you complete those sentences expresses the insights that you need in order to make the necessary high-stakes decisions about prices, your portfolio, and perhaps your overall go-to-market tactics and strategy. Some business leaders will want to know whether their customer would buy less at the same price, or switch to a competitor if they raised prices by 10%, 15%, or 20% to offset their own higher energy costs. Others would want to know whether their customers would be open to a different price model, a less expensive alternative, or a new benefit that provides assurance and reduces their risk. Most companies would want to know how customers would respond to actions their competitors might undertake.
You can’t make these kinds of essential “Whether Forecasts” without defining alternatives and understanding tradeoffs. To be precise, any alternatives you come up with in your scenarios will involve knowing the tradeoffs customers will make as a function of wants, needs, fears and worries, and how those tradeoffs will translate into immediate and near-term spending patterns.
As you develop the scenarios and set the hypotheses to test for your Whether Forecasts, we feel it is important for you to keep these three recommendations in mind:
- Understand which customers are more price sensitive and which are less sensitive: You may have one aggregate number to describe how price-sensitive your customers are. But the insights lie within the distribution, not the average. You may be able to implement differentiated and targeted price changes by knowing how price sensitivity varies, not only by customer, but also by location, time, and occasion.
- Lower customer search costs by helping them make fewer decisions. This is where some of the options we mentioned in our previous blog post come into play. Bundling is a great way to tap limited willingness to pay and simplify decisions. To help keep groceries affordable Carrefour has launched a bundle of 30 basic goods for 30 euros in Spain. Less-expensive alternatives help price-sensitive customers continue to buy from you rather than switching suppliers or leaving the category.
- Enhance value by lowering risks: We are reminded of the highly successful approach that Hyundai took in 2009. It offered Hyundai Assurance, a program that allowed anyone who had purchased a Hyundai but subsequently lost their job to return the car without it impacting their credit.
The great news is that you can explore these scenarios in advance, even the speculative ones. But you need an outside-the-box approach to do that. Past history won’t provide the answers because there are no relevant historical precedents for what is happening at the moment. Informed guesswork won’t help much either, for similar reasons. What is happening right now goes beyond the experience of almost all managers and executives.
Let EPIC be your crystal ball
The method that will help you make reliable Whether Forecasts is the 2020’s version of conjoint measurement. Our innovative research platform and deep domain knowledge will give you a better understanding of your customers’ preferences, fears, worries, and tradeoffs in a matter of days, not within the weeks or months that an old-fashioned conjoint study would require.
This empowers you to make confident product and pricing decisions with speed and precision.
Your advantage comes not only from our speed, but from our ability to deliver on all three essential components of a successful conjoint experiment:
- Design: We know how to set the experiment up to yield useful data that drive actionable results
- Execution: We have the resources to make sure the experiment is conducted properly with a quality sample
- Relevance: We know how to interpret and apply the data in ways that help you bring your offerings – in terms of features and price – in synch with the wants, needs, fears, and worries of consumers. Right now.
Why risk making high stake pricing decisions working in a vacuum. The world’s most successful brands rely on EPIC Conjoint’s pricing, product and promotion decision-making solutions to help them make successful decisions. Shouldn’t you? Let’s Meet and explore how EPIC Conjoint can help. It costs nothing to ask!
