October 10, 2023

Cost of living crisis - should it just be a race to the bottom?

Hot on the heels of the pandemic (and at least partially because of it) - the cost of living crisis sees shoppers ringing the changes in their shopping behaviour once again, as they face more turmoil and uncertainty in their day to day lives.

You’ll already be fully aware of much of what has recently been shared by others on the different coping strategies shoppers are adopting, and with how this is evidenced by behavioural trends such as the accelerated growth of the discounters and own label in the grocery sector, declining spend or a switch to lower cost options in non-essential categories such as fashion, and so on.  

The upshot is that all this can focus the mind too much on finding ways to win the “race to the bottom” by keeping prices as low as possible, or increasing promotional activity in order to remain competitive.  But is this really the only race to win?

The latest IPA Bellwether Report indicates that many believe it is certainly a race that has to be entered, with a net balance of 8.8%participating businesses indicating that sales promotion budgets had expanded in Q1’23… the biggest positive shift across all marketing expenditure.  And let’s be clear - now IS the time for brands and retailers to be helping consumers make ends meet, not only from a sales perspective but from a social responsibility perspective too;  we cannot simply ignore the impact on living standards, especially for the most vulnerable amongst us.

But… let’s not forget that even at times like these, excepting those for whom there is simply no alternative, shopping for the most part isn’t just about finding the lowest prices.  Behavioural science tells us that the decisions we make about what to buy are based on the overall ‘net value’ of the purchase:  for each and every purchase decision we make, our brain implicitly computes the net value of each purchase choice: the expected rewards vs. the expected pain (price being one of the many facets of the “pains” potentially experienced).  

Whilst “price pain” is, of course, accentuated at times like these, it is still evaluated in the context of the expected rewards. And herein lies the opportunity to win a different race, one that enables brands to be competitive on criteria that don’t punish the bottom line so much.

In this race, we can focus more on the expected rewards that brands can deliver… using those rewards rather than price alone to tip the balance of the value equation in our favour.  Scientific research tells us that there is a strong correlation between activating the human brain’s reward system with willingness to pay for goods / experiences, thereby limiting the impact of the absolute price point on the implicit net value equation I mentioned earlier.(Geek -alert: if you’re remotely interested, this reward system sits at the front of our brain, just behind our eyes… the medial orbito-frontal cortex)

So, understanding what the reward triggers are for your category has never been more important – what are the reward goals you need to deliver against to tip the value equation away from price alone? Moreover, what are the reward goals your brand can own (unmet needs), and that you can dial up across all your touchpoints to credibly (and implicitly) convince shoppers (and retailers) that you are the brand to buy… a brand they are willing to pay for?

In developing a reward-based strategy however, several considerations need to be borne in mind:

1.   How does your category fair when it comes to willingness to pay?

Let’s face it, spending less is the job to be done for the vast majority of shoppers these days. BUT, we have a tendency toward “mental accounting” meaning that we allocate spend (savings) variably across different categories and activities… money spent (saved) here means less (more)money available to spend elsewhere

Is yours a category that people tend t o mentally assign to the ‘I can save money here’ bucket or the ‘I can spend money here’ bucket?  In other words, what is the level of “saving instrumentality” in your category?

2.   Do all (your) brands / sub-brands conform to category norms?

Are your brands / sub-brands more or less subjected to saving instrumentality than others?  

In times of economic hardship, do some of your brands and variants perform a specific role that, for example, help consumers and shoppers maintain a sense of normalcy by providing alternative means of accessing rewards that may otherwise prove difficult to realise – the so called ‘lipstick effect*’?

Understanding the above helps to decide which ‘race’ to focus on the most.

3.   Finally, context is king!  Rewards are only rewards if they are relevant for consumers / shoppers at any given moment in time

Does reward relevance vary by occasion or shopping mission?

Understanding this helps to determine the who, where and when of focusing on reward vs. price as shoppers travel their various paths to purchase  

To summarise… the key message is NOT that price isn’t important, especially in this day and age. But in the face of growing competition from private labels, cheaper alternatives – recognising that shoppers’ decisions are a balance between reward and pain, and understanding the rewards your brands can deliver will drive better opportunities to grow profitably. As Premier Foods CMO Yilmaz Erceyes, said at the Marketing Week’s Festival of Marketing in October of 2022 - it’s “really easy to get depressed ”about consumers “going to Aldi” or “not buying” your category but there are “opportunities everywhere”1

* DID YOU KNOW:  The Lipstick Effect is a phrase coined by Estee Lauder during the Great Depression when sales of cosmetics rose as people tried to cheer themselves up by buying affordable luxuries


1.      https://www.marketingweek.com/premier-foods-assume-true/

Go back