The 60% of U.S. consumers living paycheck to paycheck are already cutting back on purchases because of inflation. Americans have started buying less but will be buying less across more categories if inflation persists and it’s spreading to consumers making six-figure salaries.
A new survey from CNBC and Momentive found Americans with incomes of at least $100,000 saying they’ve cut back on spending or may soon do so, in numbers that are not far off the decisions being made by lower-income groups.
The high-income consumer demographic is key to the economy. While it represents only one-third of consumers, it is responsible for up to three-quarters of the spending. As Mark Zandi, chief economist at Moody’s, notes, “If the high-income consumers are out buying, we won’t see a big impact on raw consumer activity.”
68% of high-income consumers said they are worried higher prices will force them to rethink financial decisions is significantly lower than the 82% of Americans with incomes of $50,000 or less who told the survey this, but it is still a majority.
The American consumer is in a dark mood because of inflation and continued partisan politics. The Conference Board’s most recent CEO survey showed that companies pass inflation costs relatively quickly to consumers. That pattern is likely to continue in the months ahead.
Consumers, hit by soaring costs for everything from gasoline to child care, are drawing a line, analysts and retailers say. Shoppers are buying staples in smaller quantities, switching to cheaper, store-name. Higher prices for groceries put pressure on many Americans’ grocery budgets, forcing them to change how they shop for food and essentials.
Last year, a late September survey of more than 14,000 consumers by market research term Numerator found that 20% said they would switch to cheaper brands if prices continued to rise. Seventeen percent said they would switch retailers, and 10% said they would buy less frequently. Eleven percent of shoppers surveyed said they would not change their buying patterns.
Across platforms, customers have not been afraid to exercise their ability to choose. According to an Oracle study of more than 75 million American households, 43 percent tried a new brand in 2020, compared to 32 percent in 2019. A McKinsey study found that availability, convenience, and perceptions about value were the main motivations driving shoppers to give a new brand a go, with nearly half trying a different product simply because the item was in stock, the top response. Better prices, promotions, higher quality, and the desire to buy organic or support local businesses were among the other reasons cited.
Many companies and entire industries routinely raise prices without ever telling customers. For instance, in the consumer packaged goods space, it is common practice to reduce quantity (the grammage of a package, item count, etc.) and maintain the price. This increases the per-unit amount paid by shoppers but keeps the more visible package price unchanged. Alternatively, brands may cut down on trade promotions, couponing, and other forms of discounting, raising prices indirectly. For instance, when faced with a shortage and soaring prices for chicken, KFC recently removed in-store promotions for its crowd-pleasing $30 fill-up bucket.
Decades of consumer psychology research have consistently found that attempts to obfuscate bad news rarely pay off for brands. Customers know that brands try to influence their opinions and behavior and appreciate it when they use helpful, transparent, and informative influence methods.
Research shows that after the price increase, the perceived fairness of the motive for it is the second-biggest driver of how customers react. The prospect of inflation, widespread shortages, rising input costs, and the return to normalcy after the pandemic are on everyone’s mind. Under such circumstances, when customers receive word that the brand’s price is increasing, it simply confirms what they’ve been expecting. It is worth making an effort to craft a short and forthright explanation for why the brand is raising prices.
The most effective price increase communications are customer-centric. They provide a value narrative — a vivid and compelling story for why the price is being increased that focuses on customer value.
Managers should approach the unpleasant task of communicating a price increase to customers with the same degree of sincerity, attention to detail, and customer focus that they bring to other brand-building projects like introducing new features or extending product lines. Such effort will be rewarded with a price increase that sticks, and customers feel valued partners of an authentic brand with their interests in mind. However, if you report record profits after raising prices, you will lose customers that cost you so much to get.
Raising prices can kill a brand because branding is more about convenience than anything else, and consumers are only willing to pay so much for it.