Essential Approaches to Pricing Products in Inflationary Times

CHICAGO — Inflation continues to be a powerful force in the retail industry.

The core personal consumption expenditures (PCE) price index — the U.S. Federal Reserve’s favorite statistic on inflation — showed an increase of 6.6 percent at the end of March 2022 vs. a year ago, its highest level since 1981. The PCE price index, released each month, reflects changes in the prices of goods and services purchased by consumers in the United States.

Not surprisingly, the pricing of consumer goods products is seeing a dramatic impact in these inflationary times. Many food and beverage companies have responded by raising prices, shrinking package sizes, and cutting promotions. According to NielsenIQ, all fast-moving consumer goods were up nearly 8 percent since last year.

NielsenIQ tracks consumer sentiment over time by segmenting consumer groups based on household financial capability, employment confidence, and spending patterns for years. The latest data shows that consumers are split into two clear groups: those who are not faring well with the current economic situation, and those who are maintaining their position or even doing a little better. These groups need to be marketed to differently on select products and services, according to the provider of consumer behavior analytics.

Companies have to strike a delicate balance when it comes to raising prices enough to offset higher costs without making products too expensive for consumers, who could always trade down to cheaper alternatives such as private-label brands.

NielsenIQ suggests retailers put into practice the following essential approaches to pricing products in these volatile times:

• Address hypersensitivity to price head on: Communicating with shoppers is critical in overcoming any price misperceptions. Retailers need to be frank and share the exact reasons for the increase.
• Bolster marketing programs with coupons and loyalty rewards: Shoppers are still looking for overall value. Consider promotional tactics that soften the blow of price increases, so your best customers always feel appreciated. These programs should be digital-first — meaning they engage the consumer via a mobile app or online — to ensure quick measurement of a tactic’s effectiveness.
• Focus on the trade up and trade down shopper: Store brands always grow during challenging economic times, but so do premier lines. Consumers will search for better prices in some categories, while spending a little extra on others. The key is to price each category in a way that exhibits value.
• Adjust to the new normal of bigger baskets, fewer trips: Similar to what the industry experienced during the first wave of the pandemic, shoppers are limiting their trips to the store and ordering more online. This time, it’s not for fear of the virus, but to limit their driving due to high gas prices. As a result, retailers need to better understand what strategies will best retain profitable shoppers across the business.
• Local, local, local: There is an understanding that local products may cost more to produce, but there is also the expectation by shoppers that local products should now be closer in price to similar products made overseas because of increased shipping costs. Retailers need to be transparent with customers about the price differential, or risk alienating them.

Overall, according to NielsenIQ, retailers should focus on delivering value.

Because some products see a reduction in demand when posting higher prices and others retain or grow their sales during inflationary periods, retailers need to pay close attention to individual items within a category and how each is priced.

Exacerbated by the war in Ukraine and related fluctuations in fuel prices, the underlying contributors to the current inflationary climate aren’t likely to go away next month or even next quarter. These pressures may even increase before the environment gets back to near normal, according to the insights company.