In the latest installment of the Expert Interview Series for Game Changer, pricing expert Lionnel Bourgouin explores why some companies are making the transition from the Custom Game to the Choice Game. By seizing opportunities to simplify their portfolios, focus on specific segments, and sell on value instead of on discount, these companies are improving their financial performance and their customer loyalty. You can watch the video here.
In case you missed them, here are some posts since last week’s newsletter.
Travel and live sports: Recent trends show that young travelers are prioritizing experiences and personalization. Traveling to live sports events is an increasingly popular way to fulfill both desires. You can read the full post here.
A fair price for lithium? The price for lithium, an important component of rechargeable batteries, has plunged recently. Are suppliers better off using auctions or negotiations to get fair and stable prices? You can see the full post here.
Social posts reveal consumer trends: Diageo, a world leader in branded alcoholic beverages, has identified several interesting consumer trends by analyzing what people are posting about on social media. You can read the full post here.
A Gallup poll released last week revealed that inflation remains the biggest concern among Americans. The concerns about high prices are easing, but clearly not as fast as the inflation rates themselves. In this week’s guest contribution, my Game Changer co-author Arnab Sinha and our colleague Sebastian Bak look at why consumers are struggling to adjust to new prices and what a new equilibrium could look like.
Anchors Away? How consumers are adjusting to new price levels
In periods of modest inflation – such as the years-long period before 2020 – prices coexist in equilibrium with other decision criteria when consumers hit the stores. In addition to price, shoppers may evaluate retailers for their convenience and their in-store or online experience, and they may buy products based on quality and brand. To remain competitive and signal their price image, the more sophisticated retailers maintain this equilibrium by keeping prices intentionally low for key value items (KVIs) while raising prices slightly on other products.
But over the last two years, we have all witnessed what happens when a domino effect of various forces increases costs and prices so much that the old equilibrium no longer exists. The latest wave of inflation peaked at 40-year highs before subsiding, and this article in the Wall Street Journal last month described its lingering effects.
Citing data from NielsenIQ, the article listed several staple items – from eggs and cooking oil to bleach and baby wipes – whose prices rose by 50% to 75% between February 2022 and February 2024. The price for deodorant rose by 58%.
Recommended by LinkedIn
A Market-Moving Menu of Data and Events
“After paying under $4 for his signature Old Spice Stronger Swagger for a decade, the 49-year-old was shocked last year to see it priced at $7.99,” the article said about one consumer, quoting him as saying that his “brain just cannot rationalize paying twice as much.”
There are widely accepted psychological explanations for why consumers can’t rationalize the massive price differences. One is Weber Law’s, which suggests that people won’t notice a change as long as it stays below the threshold of a “just noticeable difference.” How large the Weber threshold is for prices is still subject to research, but a difference of 5% is considered reasonable. As long as price increases remain consistently below that threshold, consumers are less likely to notice.
The second explanation is that consumers tend to use anchor prices or reference prices to make comparisons when they shop. The anchoring effect occurs when people rely primarily on one piece of information – often the first information they see – when they make a decision. The prices they customarily pay, even if only approximate, provide such anchors.
No escape from the price chatter
These price changes have left many consumers in limbo, because the constant chatter about prices is preventing a new equilibrium from taking hold. Consumers now pay more attention to prices, even to the normally stable prices of KVIs. The media’s constant reporting on inflation, interest rates, the decisions of the Federal Reserve, and so on, amplifies this attention. Prices have become a natural small-talk ice breaker.
Prices also received heavy media attention in the crises of 2001 and 2008, but the root causes were different. The focus then was on lower consumer confidence and where to find bargains, not on inflation. Nonetheless, today’s consumer responses are similar. They are sacrificing convenience, trading down to less expensive alternatives, shifting from more expensive channels to discounters and warehouse stores, and actively seeking promotions. But this time, we have a sense that consumers’ price anchors – the mental tools they use to assess value – are stickier than anticipated. That will affect both the form and the timing of a new equilibrium.
When and where will the new equilibrium occur?
Let’s phrase that question more precisely: will this stickiness of anchor prices result in long-lasting changes to purchase behaviors or will there be a slow recovery back to pre-inflationary purchase behaviors?
We won’t see an answer to that question in the short term, but we won’t need to wait indefinitely either. Consumers will eventually see fewer reminders about prices and will gradually get used to new price points. Most importantly, they will start getting tired of their sacrifices, such as driving further for lower prices or trading down from products they like.
But it will take time, because all the multipliers we mentioned above will persist in the coming months. The magnitude of the price changes over the last two years, relative to people’s anchors, was also too large for consumers to absorb quickly.
The combination of less attention to prices and sacrifice fatigue will lead to a new equilibrium, and we expect a partial return to old habits, but not a complete one. Consumers who can afford it will experiment with new purchase behaviors, but eventually, the majority will accept the new reality and revert to prior purchase habits at new anchor prices. For many less affluent consumers, however, trading down and buying on promotion will be a new way of life.