Mitigating Inflation Through Intelligent Customer-Centric Pricing

Even as inflation subsides, its lingering effects will persist. Grocers’ pricing decisions today will shape customer perceptions long after prices and branding are adjusted, making accurate pricing crucial not just for competitive reasons, but for maintaining customer trust.

According to the USDA, consumers have spent 11.3% of their disposable income on food, the most since 1991 when it was 11.4%.

And despite the inflation tempering, grocery costs are up 1.2% from January to February…. and don’t expect it to come down anytime soon.

The long-term impact of rising grocery prices is significant, as they rarely decline. The U.S. Department of Agriculture’s finding that households in 1991 were still affected by the 1970s inflation underscores this point.

Before last year’s historic rise in inflation, US consumers were accustomed to steady inflation of ~2%/year over the previous 10 years and 3%/year in the 20 years before that.

Gen X, Millennials, and Gen Z consumers have never seen price shocks. For Baby Boomers, it’s a distant memory from early in their careers. Consumers must reset their price anchor to the new reality, and that won’t happen quickly.

Today’s reports show that price expectations aren’t even close to being aligned. 

Consumers recall when butter was $1.89, but now it’s $3.50. A pound of peaches went from $1.89 to $2.99. Need more confirmation? Just look at the graph below, which demonstrates the shock.

Although consumers accepted higher prices during the pandemic due to supply chain disruptions, labor shortages, and increased demand, prices continued to rise. Even as inflation has moderated, it has stubbornly remained above the Federal Reserve’s 2% target, hovering between 3% and 4% since May 2023.

Consumers viewed price hikes as temporary.

“The fact that they’re not and they’re continuing to go up is frustrating.”
-Stephanie Tully, Professor at the University of Southern California’s Marshall School of Business

Source: WSJ.com, We Still Don’t Believe How Much Things Cost

Shrinkflation isn’t helping either, to the point that Senator Bob Casey is getting involved.

He released government data which he said shows that some CPG companies try to mask inflation by quietly downsizing product sizes without adjusting prices or clearly notifying consumers. In a follow-up report, he also expressed that from July 2020 through July 2022, inflation rose by 14% while corporate profits rose by more than 74%—nearly 5x the inflation rate. While politics can play an angle, it does reflect consumer sentiment.

Current Consumer Sentiment and Impact on Spending

Consumer sentiment is backed by financial facts.

People’s financials are taking a hit.

As of mid-2021, US consumers had over $2 trillion in savings, a peak from the pandemic. In November 2023, that number was $321 billion. More importantly, the excess savings drawdowns have been relatively even across income groups. Additionally, this is happening during a period of very low unemployment, the latest reading being 3.9% in February, up a tick from 3.7% in January. So, people are working and falling behind.

401k plans offer another data point. Despite higher savings in 2023 into retirement accounts, 401k hardship withdrawals are up. Around 3.6% of 401k participants pulled money from their accounts, compared to 2.8% in 2022 and above the pre-COVID-19 pandemic average of about 2%.

Finally, despite all the stimulus money, low unemployment, and tempering inflation, consumers have never, once in the last four years, felt as optimistic about the overall state of the economy or their personal financial situation as they did before the pandemic. However, their optimism did fall to all-time lows in June 2022.

Consumers are feeling the pain of inflation and becoming frustrated with continued high prices.

These financial pressures force consumers to reduce spending, switch to cheaper brands, shop around for discounts, and buy fewer non-essential items.

The Need for Customer-Centric Pricing

Grocers need to take a customer-centric approach to pricing which requires answering these questions:

• What items do your customers care about, and how are those items affecting your business’s price/value perception?
• When the price increases or decreases, how does that affect the sales of that product?
• How do customers react to your promotions? What is the lift from the offer and the ad placements?
• How do the previous answers differ by market or store?
• How are the answers changing over time?

Most grocery retailers start pricing based on cost, margin, brand, size, and competitive rules. And while these factors are important, none look at the customer.

Understanding how your customer demand changes relative to price or the price elasticity can help you decipher the pricing opportunity.

On visualization of this is an opportunity curve where you plot an item’s price range across the revenue and profit impacts. Then, plot where your item’s current price to see what the potential benefit of a price change is. You can also take another step and graph how your current pricing rules shrink the overall opportunity. The end visualization is the equivalent of picking a point on a graph.

While this is a great visualization, the power comes from:

1. Analyzing every item within your assortment
2. Across every location and
3. Updating it over time as consumer preferences shift.

This allows you to set the best prices for your enterprise according to your strategy and goals.

Balancing Profit and Customer Value

Looking to grab some additional market share and where you can lower prices without destroying your profitability? Did your vendors raise costs, and you want to determine where you can save some of your margins while still being ultra-competitive? This analysis is the foundation of answering those questions. It balances the trade-offs.

Both consumers and grocers are dealing with the impacts of higher costs and inflation.

Consumers see more of their income covering food expenses and their savings dwindling.

Grocers are coping with higher operational costs, rapidly shifting consumer spending behaviors, and pressure to find profits without alienating their customers. Unfortunately, none of these pressures will leave anytime soon.

Taking a consumer-centric approach and listening to the signals that consumers give with every purchase decision, grocers will align their prices to customers’ expectations while ensuring healthy profits. Consumers have never been against businesses making a profit; they want fair, competitive prices that justify the value.