Inflation is edging to its highest level in nearly 40 years, according to the April 2022 Consumer Price Index, which reported an overall year-over-year increase of 8.3%. While higher prices haven’t done much to sway consumer spending up until this point, recent data reveals that might now be changing.
According to the results, 74% of consumers have lost confidence to spend money due to inflation, and more than half are concerned about their income or job status because of the state of the economy. And they aren’t optimistic about inflation ending anytime soon. Only 36% of respondents believe high costs will normalize within one year.
While the above survey only included adults in the United States, similar sentiments are being echoed around the world. Retail sales slipped in the U.K. in April due to “crushed consumer confidence” from the rising cost of living. Likewise, consumer morale in Germany dropped -26.5 points leading into May.
Consumers holding on a little tighter to their wallets is not good news for retailers. But as inflation is inherently a pricing problem, pricing can also be the solution. Let’s dive a little further into some of the key takeaways from the study and a few practical pricing strategies retailers can use to bolster consumer spending confidence.
Inflation denial has officially passed. Almost all (96%) of survey respondents say they’ve noticed prices around them increase. The two categories where increases are most noticed are gas (72%) and groceries (69%). Other categories included dining out, vehicles, apparel, and household goods.
So, while retailers need to find a way to cover their higher costs, simply pushing them all on to the consumer means those customers will certainly feel it. When consumers are holding on to their dollars a little more closely, once-loyal customers are looking around for a good deal rather than remaining brand loyal. Brands that don’t find the balance between price sensitivity and costs will lose out to the competition.
To take a balanced approach to pricing through inflation, retailers will need the right analytics suite to get a granular and intimate understanding of their customers’ purchasing behaviors. They may be surprised to find out that, in these times, they can actually balance price increases with decreases to maintain both margin and consumer goodwill.
Along with heightened price awareness, more consumers are watching their wallets and getting pickier with their purchasing decisions. Ninety-seven percent of survey respondents reported prioritizing spending on the most essential items due to inflation, and forgoing other categories such as home décor, travel, and gym memberships.
As consumers place more importance on value during inflationary times, retailers need to focus on meeting customer expectations in order to avoid being deprioritized from their spending. Finding creative and practical ways to mitigate the impacts of inflation is key to continuing to satisfy customer needs.
One way to fight back against inflation is to lean into your private label brands and see what assortment gaps your owned products might be able to fill. Transparency is also increasing in importance with consumers.
But building a truly balanced, comprehensive response to inflation will require more than just a few disjointed strategies. An Artificial Intelligence (AI) pricing solution can help retailers truly achieve a win-win with customer-centric, value-generating pricing.
Unsurprisingly, rising prices have consumers hunting more deliberately for sales and promotions: 42% say they are now shopping for deals—seeking out sales or shopping the clearance racks. Additionally, 40% of survey respondents say they are now staying within a budget, 28% say they are buying less overall, and 25% are shopping at bulk stores or warehouse retailers.
However, simply running more promotions isn’t the answer. Too many offers can muddy the shopper experience and actually lessen the sense of value gained. Instead, retailers should focus on truly effective promotions that give consumers what they want.
It’s true, assessing promotional performance is often easier said than done. But conducting a Promotional Performance Analysis will evaluate which promotions are profitable and impactful, and which are not worth the effort.
At least one pandemic trend is here to stay: Consumers are buying more private label brands. One in five of those surveyed said that one of their household strategies to combat rising prices would be to purchase more private label items.
While unpredictable supply chain strains and high inflation rates have created a number of headaches for retailers over the past couple of years, they’ve also significantly expanded the opportunity for private label brands. Reports show that grocery categories with the highest inflation in 2021 actually saw the most private label penetration.
But in order to continue that momentum in a sustainable way, retailers need to approach their private label pricing strategically. Leveraging analytics can empower retailers to find the best pricing architecture and set the optimal pricing gaps for each product in each category to fuel the specific goals for that private label brand, whether it’s margin growth, market penetration, or any other objective.
Pricing can also be a powerful lever to pull for private label growth because retailers don’t have any of the vendor influence to contend with like they do with national brands. Having complete control over pricing and promotions for own brands creates a strategic opportunity for earning market share.
Convenience stores certainly felt the impact of reduced road traffic in the early months of the pandemic. And while domestic travel and road trips picked up speed throughout 2021, spiking gas prices are going to tamp travel back down again. In fact, 42% of consumers say they are driving less due to the high cost of gas, and 35% plan to take fewer vacations.
These stats may be a cause of concern for c-stores. However, there are a few ways pricing can be leveraged to help mitigate the impact of having fewer travelers on the road. For example, using trade-up strategies and affinity analytics to increase basket size and get more value out of each transaction. Or pushing frequency-focused promotions to drive more trips to the store.
There are a number of other strategic pricing moves that can help keep customers coming to the store, but the key to success for all of them is data. Without the right data, every tactic is just a shot in the dark. But armed with analytics and AI, retailers can predict the impact on demand patterns, assess which strategies will be most effective, and build a comprehensive approach to increasing shopper frequency.
We’re not through the worst of inflation yet. With consumer confidence taking a turn for the worse, retailers need a strong and strategic pricing response. At Revionics, we’ve guided retailers through economic extremes and instability before, including inflation. For more practical steps you can take against inflation, download our inflationary pricing guide or reach out to our experts today.
Maisie is a content marketer and copywriter specializing in B2B SaaS, ecommerce and retail. She's constantly in pursuit of the perfect combination of words, and a good donut.