There are many reasons why Americans do not feel positive about the economy. Even though we read and hear that inflation is easing, many Americans do not feel secure and financially stable. A significant portion of Americans are being left behind.

One reason for the bummed-out view of the economy is the continual price hikes on all sorts of products and services. The Wall Street Journal pointed out, in two separate stories, “We Still Don’t Believe How Much Things Cost” and “The American Dream Left Some in the Dust” how continually higher prices affect customer-perceived value

Put the blame on package goods manufacturers, fast food restaurants, casual dining restaurants, movie theaters, car dealerships, dollar stores and so forth. In the COVID-19 years, brand-businesses raised prices. In the post-COVID-19 years, brand-businesses continued to raise prices. And, after the COVID-19 dust settled, brand-businesses from McDonald’s to Chipotle to Tide to Dollar Tree raised prices. Chipotle’s classic chicken bowl with chips, guacamole, and a drink now costs $20. Dollar Tree plans to add 300 items that cost up to $7.00, according to Bloomberg.

These brand-businesses generate profit, showing great margins to analysts. Margins are revenues left over after paying expenses. The C-suite focuses on increasing margins. In fact, over the last 8 months, as prices were being continuously raised, here are what brand-businesses said about margins:

Kellogg said it must stabilize and protect its profit margins.
Mondelez’ CFO said, “We announced price increases around the world to ensure that we retain our margins….”
At Pinterest, the goal is “meaningful margin expansion.”
At Clorox, the aim is to “build margin over time.”

Raising prices to protect margins is a manufacturer focused strategy. This is why you see the US automotive companies ditching sedans to focus on “high margin” vehicles like trucks and SUVs.

But, while genuflecting before the temple of margins, these brand-businesses changed the brand-business customer-perceived value of their products and services. As prices rose, customers noticed huge differences between what they believed were the standard prices for items and the new prices for these same items. Customers have internal reference prices. The new prices were way above customers’ internal reference prices.

Internal reference price is the customer’s perceived, expected, just, fair price. A customer’s internal reference price is the standard, acceptable price against which customers evaluate the actual price of the product or service considered for purchase.

Purchasing products with prices well above expectations has been painful. The Wall Street Journal interviewed individuals experiencing the pangs of pricing pain. People said that current prices make no sense. A $4 price increase for deodorant “… doesn’t feel right.” The tripled price for dry cleaning a shirt “…hurts.”

NielsenIQ data quoted by The Wall Street Journal show exorbitant price increases across a variety of grocery categories. Deodorant, milk, nutrition bars, dog food, paper towels and bleach all raised prices anywhere from $2.50 to $3.50. Increases can be higher depending on where you actually shop.

Part of the internal reference price problem is what customers expected post-pandemic. Customers understood that the Coronavirus upset supply chains and manufacturing. But, customers also expected that prices would return to normal, that is, return to the internal reference prices, once the pandemic eased. Customers expected prices to return to normal because people went back to work outside the home, manufacturers had fewer sick personnel and supply chains steadied.

But, brand-businesses did not return to pre-pandemic pricing. Just the opposite. Prices continued to rise. The continuing behavior of price-raising has affected customers’ perceptions of fair value and this makes customers unhappy. One interviewee stated that he felt “shock and anxiety.”

Current prices for all sorts of goods are perceived as unfair. Brand-businesses should be behaving better towards their customers. A columnist for Bloomberg points out that dollar stores have forgotten their core customers, those customers “who made dollar stores rich.” Pissing off loyal customers is a financial formula for failure.

Brand-businesses need to change how they think about pricing. Being strategic about pricing is more than testing for optimal prices. That is a manufacturers view of pricing. Brand-businesses must apply a psychological lens to strategic pricing. 

A recent article appearing on Harvard Business Review online, talks about pricing and price testing. Based on the descriptions of the price tests conducted, one can conclude that customer psychological issues were not addressed, just behavioral issues. The focus of the testing was from the manufacturers’ perspective, not the customers’ perspectives.

Data indicate that pricing has a psychological component that significantly affects customer behavior. Reference price is only a part of this human psychology.

Economist Richard Thaler has spent a lot of time examining financial behavioral and psychological interactions. Professor Thaler won a Nobel Prize for his contributions connecting economic and psychological analyses regarding decision-making. One of his contributions addresses the “pain of paying.”

Pain of paying can happen with any sort of purchase. Professor Thaler remarked that customers feel the pain of paying when sitting in a taxi cab and watching the meter fare increasing or watching the dollars tick upward at the gas pump when filling your tank. Right now, customers feel that every shopping experience is like sitting in that taxicab watching as prices for necessary goods continue to tick up.

As for one’s internal reference point, Professor Thaler noted the importance of an internal reference price on decision-making. Customers integrate their current experience (what it costs now) with prior outcomes (what is used to cost).

Another critical price issue that tends to be overlooked is the brand-business indifference point. The indifference point is a price at which your customers start to think that it is better to switch to another brand-business because the expected experience will probably be the same but at a lower price.

This indifference point affects brand-business loyalty and brand-business switching. Research shows that a loyal customer is less price sensitive than a deal loyal customer. But, there is a point at which the loyal customer’s favorite brand-business has raised the price so high that the loyal customer becomes brand-business indifferent and now considers purchasing the same type of product from a competitor.

Knowing the indifference point is a necessity in strategic pricing. Data reveals that at a 10% increase, a loyal customer hits that indifference point. The NielsenIQ grocery data show that the price increases in multiple grocery categories are already very close to or at the 10% indifference point.

Another issue: marketers tend to forget that they set the price; but they do not determine the value. The customer determines the value. Raise prices too high and the customer perceives the brand-business to be less of a good value.

Price is a cost. Professor Thaler refers to price as the acquisition value. Acquisition value is the actual money you spend to acquire a product or service. Then, there is the transaction value. This is the customer-perceived worth attached to the product or service.

If the internal reference price is the same as the acquisition price, then the value of the transaction is zero. If the acquisition price is lower than the internal reference price, then the customer perceives a good value. If the acquisition price is higher than the internal reference price, the customer perceives poor value.

It is probably easier to understand this assessed worth of a purchase or potential purchase in terms of our Trustworthy Brand-Business Value Equation.

Trustworthy Brand-Business Value Equation is the total brand-business experience (functional benefits, emotional and social rewards) relative to the total brand-business costs (price, time and effort) multiplied by trust. What you get relative to what you pay multiplied by trust. Trust acts as a multiplier when customers take mental assessments of a brand-business’ worth. Do I believe this brand-business experience relative to the costs will be quality? Will be delivered consistently? Will meet my expectations? If there is no trust, there is no value. Anything multiplied by zero is zero.

Fair value is inherent in the Trustworthy Brand-Business Value Equation. Right now, customers question the fair value of their favorite brand-businesses. Fair and just mean that the benefits-per-costs in the Trustworthy Brand-Business Value Equation are equitable. If your brand-business is deemed unfair and unjust, your brand-business loses trust.

Price hikes only work if the customer perceives the brand-business to be worth the cost. If the price becomes too high relative to the total brand-business experience, trust declines. The brand-business is no longer perceived to be good value. The deviation from internal reference prices informs customers of just how far into the stratosphere the brand-business has moved away from normal pricing.

Screwing around with internal reference prices affects the customer’s relative perception of the brand-business being a desirable value. Without customer-perceived value, there is no shareholder value. If a marketers’ price increases turn off customers, then, the marketer is responsible for negatively affecting shareholder value.

You cannot create sustainable value for your shareholders until you create enduring value for your customers. All cash flow only has one source. And, that one source is a customer exchanging money for what you offer.  There is no other source of cash flow. For sustainable increase in shareholder value, brand-businesses must create enduring customer value.  No brand-business can create sustainable value for its shareholders without creating enduring value for its customers.

Currently, brand-businesses are shooting themselves in the foot. New York Federal Reserve data indicate that brand-businesses which pride themselves on affordability have share prices well below the S&P 500. This is due to the fact that many customers can no longer afford to frequent these brand-businesses as often.

McDonald’s is one of those brand-businesses. From its inception, Ray Kroc believed in McDonald’s ability to provide customers with value. Ray Kroc’s mantra was QSC&V: quality, service, cleanliness and value. Mr. Kroc is probably turning over in his grave as McDonald’s prices are at unbelievable highs. Lower-income diners are dropping out of McDonald’s more often. Olive Garden also reports that lower-income customers are cutting back.

Brand-businesses must address a customer’s internal reference point, the acquisition and transaction values, the indifference point, the pain of paying and the Trustworthy Brand-Business Value Equation prior to rising price even 1 cent.

Consistently raising prices, without concern for the psychological effects on customer bases, as well as the ability to pay, has probably grounded customer perceptions in a dreadful head space. A $16 McDonald’s meal; a $20 Chipotle bowl; a $12.78 stick of Dove+ Care Extra Fresh Antiperspirant Deodorant; an $8.25 22oz box of Kellogg’s All Bran; a $7.09 14.7 oz box of Maple Cinnamon Cheerios Hearty Nut Medley, all indicate huge price deviations from customers’ internal reference prices.

When General Mills’ pet food sales do better than its iconic Cheerios cereal brand-business, you get the idea of how unbelievable a $7 less-than-one-pound box of cereal is for customers. Potatoes are cheaper, at a little more than $2.00 a pound. You could eat hashbrowns for a week and still not spend as much money as a box of Maple Cinnamon Cheerios Hearty Nut Medley.

In the extremely prescient movie, Network, there is a scene where actor Ned Betty’s character, Arthur Jensen, owner of the network where Howard Beale is a prophetic, popular TV madman, speaks to the increasingly unhinged Mr. Beale. Mr. Jensen begins his rhetoric with this statement: “You have meddled with the primal forces of nature, Mr. Beale…”

Are brand-businesses responsible for our gloomy economic feelings?

Yes.

There are a lot of reasons for the glum reactions amid relatively positive economic news. But, brand-businesses are complicit.

Brand-businesses meddled with internal reference price, a primal driver of customer value perceptions. And, because government cannot stop this profit-seeking-at-the-expense-of-customers, people have a sense of impending trouble hanging over their heads, leading to negative perceptions of the economy.

Contributed to Branding Strategy Insider by: Larry Light, CEO of Arcature

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