For many retailers, the response to this trend has been to focus on reducing prices for products and services, whether through ‘Everyday Low price’ strategies, or increased frequency of price promotions. Just think about how many big online sales events there are now, and how often you see ‘biggest sale ever’ banners in stores.
The latest example is Aldi, which recently announced it will permanently cut prices on hundreds of core items, with discounts of to 30 per cent.
“We began reducing the prices of our already price-leading products at the start of the pandemic, and these permanent reductions reaffirm our continued commitment that Aldi will never be beaten on the price of your weekly grocery shop,” said Aldi Australia managing director, Oliver Bongardt in a statement.
In March, retail giant Fast Retailing announced that it would start cutting the prices of its products in Uniqlo and GU stores in Japan by around 9 per cent.
Lower prices are great for consumers, particularly those who have been hit hard from Covid. Yet, there are risks for retailers from cutting prices. The immediate ones include reduced profit margin, and pressure on suppliers to reduce their own costs. In other words, the difference must come from somewhere. However, there are also longer-term problems which may be less obvious, such as creating a new lower reference point for other products, and even inadvertently training customers to wait for products to be on sale.
So now is a good time to revisit what price really means, and the other strategies retailers could use to appeal to price conscious consumers.
What does price really mean?
Let me temporarily put my academic hat on and go back to Marketing 101, and the distinction between ‘price’ and ‘value’. price is what a buyer gives up in exchange for a product or service. In most retail cases, this means the money paid for a sale. Although in some exchange-based settings, it could mean the product or service that is provided in return. For now, let’s keep it simple and focus on monetary transactions where price is easy to define.
Price is different from value. Where price is what a consumer pays, value is broader and based on the trade-off between what a consumer gets (the benefits) compared to what they give up (the costs). The distinction between the two is important, as it shows that a product’s price is only part of what matters.
To give an example, would you want a bag of month-old mouldy vegetables, even if they were free? Probably not, because even though there is no cost, they also have no benefit (unless perhaps as fertiliser) and so their value is also very low. In contrast, would you be willing to pay $15 for fresh, organic vegetables prepared in a delicious sauce from your favourite restaurant? In this case, even though the price is higher, you may see it as good value because the benefits (taste, experience etc.) are higher.
The point of these examples is to show that price is not the only thing that matters to consumers. Instead, what really matters is value – the trade-off between the price and the benefits the consumer perceives they will get for that price. This is important to remember when we talk about ‘price-conscious consumers’.
Given the difference between price and value, when we talk about ‘price-conscious consumers’, we really mean consumers for whom the value equation is more heavily weighted towards costs (as opposed to benefits) than other consumers. That is, when considering whether to make a purchase, or evaluating different alternatives, these consumers will be more swayed by the price of the product. This doesn’t mean they won’t buy things with a high price; it just means they need to clearly see the benefits before they do.
Do a Google search for ‘price conscious consumer’ and you’ll find an abundance of reports discussing price conscious consumers and providing strategies of how to appeal to them. Price consciousness is also a popular topic in academic research.
For instance, one study1 suggests price conscious consumers are distinguished by their personality traits and social media use, and that encouraging shoppers to share price deals with others is a good way to reach them. My own research also shows that price consciousness is a strong predictor of various multi and omni-channel shopping behaviours.
However, another study2 shows there are potential downsides to focusing too much on price consciousness. For example, if a retailer promotes price too heavily (e.g., a big one-day-only sale), consumers can become solely focused on securing a bargain, and become harsher in their interactions with staff as a result.
There is also increasing research on uncovering what is driving the increase in price conscious consumers. One of the big factors is inequality in incomes distribution and growth over the past few decades.
In a major report on the ‘Squeezed Middle Class’, the OECD detailed how income for the upper classes has grown steadily, yet has stagnated or even declined for middle- and lower-class households. In fact, the inequality is so impactful that the proportion of people globally who fall into the ‘middle class’ is declining, with many households falling behind and being pushed into lower income classes. In simple terms, this means that while the rich are getting richer, most consumers are finding more of their income going towards basic life expenses. It is not surprising then that these consumers have become more conscious of the price they pay for products and services, particularly for regular purchases like groceries.
Appealing to price conscious consumers
Given that consumers are becoming more price conscious, the key challenge for retailers becomes how to appeal to these consumers. As I noted earlier, cutting prices works but it comes at the cost of margin. It also can change consumer perceptions of what the price of other products should be, through the ‘reference price’ effect.
In essence, this effect means that if I see 2 litres of milk for $1, it makes the $5 cost of orange juice seem high in comparison. Whereas if milk is $4, then $5 for orange juice doesn’t seem so bad. In this example, the cost of an everyday product like milk becomes my ‘reference’ point which I compare other prices to. So, cutting prices to core products could shift the reference point lower for other products, and lead retailers down a challenging path from which it can be hard to return.
The big question then is what can retailers do other than dropping prices? One answer is to look at value beyond price. Ask yourself whether you can increase the perceived benefits of your product or service instead of reducing the price. Can you add unique informational content that helps your customers use your product? Or could you educate consumers about a unique component of the product or service they may not be aware of? By doing so, you may help consumers see the value of your product at its current higher price.
The other answer is to look to other marketing tactics beyond price. Whether you believe the 4 (or 5, or 7) Ps of marketing are “dead” or not (that’s a debate for another article), it’s important to acknowledge that price is only one marketing tactic to attract customers. Whether we call the others product, promotion and place, or something else entirely, they still represent other critical components of a complete marketing mix. Of these tactics, we, and consumers, often focus on price as it is easy to see, quantify, and compare across products and brands. Yet, it is important to not forget about the other components. So as above, instead of just communicating low prices, can you improve the product itself? Or better promote it? Again, the idea is to show consumers that the benefits of the product outweigh its current price.
I’ve had the opportunity to do a lot of industry trend presentations. For a while the team I worked with liked to start every presentation with a quote: “Only one brand can be the cheapest, for everyone else there’s experience”. This still holds true. Reducing price can work but is risky, and there may also be someone else cheaper. Instead, focus on offering value – whatever the price may be.
1 ‘Reaching the price conscious consumer: The impact of personality, generational cohort and social media use’ Jacqueline Eastman and colleagues in the Journal of Consumer Behaviour2 ‘Discounting Humanity: When Consumers are Price Conscious, Employees Appear Less Human’ by Alexander Henkel and colleagues in the Journal of Consumer Psychology.