Price is about perceptions. It is also about reality.
Which is to say that price involves both perceptions of value and the reality of affordability. The former is competition, expectations, benchmarks and benefits. The latter is what’s actually in the wallet. Value comes into play only when affordability is no barrier.
Most of the time, value is the salient pricing issue. Meaning that the typical task is managing brand perceptions. To build growth and equity, pricing power is critical, which is perceptions. A big part of locking that in is framing price properly.
We have studied these pricing issues extensively at Kantar. Mastering the levers of pricing power must be part of a brand’s competencies.
We also have a good view of affordability. This is the bigger issue right now. Wallets are being stretched thin, so a different mindset is influencing decisions. Consumers want value, but more than that they need help with affordability.
This probably seems surprising, given recent news about a strong economy. Real GDP growth in Q4 2023 was 3.2 percent and 4.9 percent in Q3, both above expectations. As was job growth. Real spending in December was up 3.2 percent year over year, the highest monthly bump in nearly two years. Holiday spending was strong. Real spending in January came in at 2.1 percent, roughly on par with the 2023 average of 2.2 percent. Early tracking of February looks good. And the Fed is projecting the economy to improve by year-end.
All in all, good news. There is another side to the coin, however.
Consumer sentiment remains low. In the University of Michigan tracking, there was a sizable bump in January, but that flattened in February. More importantly, the level remains low. The last three years have been remarkable because sentiment this low has been seen only during recessions. The last time sentiment was this low for this long was the early 1980s, but it took two sharp recessions then. Whatever spending trends show, something is deeply amiss with consumers.
Part of this is uncertainty and volatility, both economically and politically. People are not yet convinced they can count on the economy.
Inflation is down substantially since peaking in June 2022, but we tend to forget that low inflation is not a reversal of prices, just slower growth. Inflation compounds. Prices have reset higher. In particular, post-pandemic topline growth for global FMCG companies has been driven by price increases not unit volume growth. The past three years of cumulative price increases have been equivalent to the prior nine-plus years. That is the consumer story in a nutshell.
Household budgets include insurance, housing, medical expenses, and other obligations like tuition or unexpected mishaps. Not just groceries. The costs of all these things have gone up. When everything costs more, consumers are not thinking about value as much as stretching every dollar.
Relief monies from Trump and Biden sustained people during the pandemic shutdowns. By and large, though, those dollars could not be spent right away, so people banked it. To the tune of $2.5 trillion, which fueled the strong spending in 2022 and 2023. But that money is gone.
The strong job market has also helped sustain consumers. But inflation took a toll on spending power. Wage growth did not get ahead of inflation until the middle of last year, and now wage growth is slowing.
Consumer spending is narrowing as well. A Morgan Stanley analysis of the Consumer Expenditure survey of the Bureau of Labor Statistics found that the top 20 percent of households in terms of income accounted for 45 percent of all spending growth in 2021 and 2022.
Compared to 39 percent over the 15 years prior to the pandemic. In other words, middle-income households have been struggling.
Consumer debt is spiraling up, especially credit card debt, which is very expensive given current interest rates. In parallel, and unsurprisingly, delinquencies are rising. Delinquencies are not high by historic standards, but the trend is telling.
What this trend is telling us is that affordability is the reality facing most consumers right now. Spending has been robust, but consumers are more fragile than before the pandemic. When it comes to pricing, affordability is the challenge at hand.
Contributed to Branding Strategy Insider By: Walker Smith, Chief Knowledge Officer, Brand & Marketing at Kantar
At The Blake Project, we help clients worldwide, in all stages of development, define and articulate what makes them competitive and valuable. We help accelerate growth through strategy workshops and extended engagements. Please email us to learn how we can help you compete differently.
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