India and the world are now discussing rapid inflation at the highest policy-making levels. Virtually every day, there are reports on the rising prices of fuel, transportation, edible oil, vegetables and fruits. Recent estimates say that retail inflation is likely to breach 8 per cent in the second half of 2022, which will be the highest level reached for several years. The continuing war between Russia and Ukraine has only added fuel to this fire.
Inflation impacts consumers directly in the immediate term and there are second order impacts also, as higher interest rates, which are intended to curb inflation in the medium-term, lead to higher EMI outflows immediately. How best should marketers address such an inflationary scenario?
Faced with rising input costs in many industry sectors, there suddenly appears to be significant pressure on marketers to pass on these costs to consumers by increasing prices. While this appears to be an obvious solution, it is not necessarily the only way forward in all cases. On the other hand, marketers need to consider more nuanced approaches which suit their categories and consumer segments.
Understand customer behaviour
The first step is to understand customers better. For instance, if you are marketing a premium brand of chocolates to upper-middle class Indians, what is likely to happen when you increase prices? Are your customers likely to downgrade to a lower priced chocolate, to help manage their budgets? Or are they likely to reduce the number of chocolate eating occasions? Or, instead, will they buy lower priced packs which contain less grammage of the same brand of premium chocolate? If they are in the habit of gifting chocolates, will they now begin gifting some other item where prices have not gone up in the same proportion? Or could it be that they will continue with status quo – eating and gifting the same quantities of the same premium chocolate, because your brand is so integral to their lives?
The answers to these and similar questions must be taken on board alongside cost and margin pressures, to reach optimal decisions. To get a true picture, marketers need to speak afresh to their customers to discover these answers. Past empirical data, derived from a benign non-inflationary environment, may not provide the right answers, because consumer behaviour tends to change significantly when inflation expectations have suddenly spiked.
Think of innovative solutions
Brands are built on the bedrock of consumer trust. If consumers feel that their favourite brands are engaging in merely passing on cost increases to them without helping them navigate the heat of inflation, their trust in these brands is likely to erode. Hence, marketers need to think of innovative customer-centric solutions.
For instance, there is evidence that some FMCG marketers in India have stepped up focus on introduction of “bridge packs” to help manage consumers’ search for affordability. These bridge packs are priced between popular entry-level packs and big packs.
Yet another innovative approach has been the selective use of promotions, which offer price discounts on a few specific products or pack sizes, post implementation of a price increase. This ensures that appropriate value is conveyed to the right consumer segments, while helping address overall inflationary cost pressures.
Category and brand connect
Marketers will be faced with the temptation of cutting down on advertising spends during an inflationary period. These are typically regarded as discretionary, and inevitably come under scrutiny when profits are under pressure.
Such temptation should be regarded with caution. This is a period when marketers need to persuade their consumers to continue to use their specific category and brand. The level of persuasion required may vary from staple foods such as dal and rice to discretionary products and services such as ice-cream or a loan to upgrade to a larger screen television.
In an inflationary environment, customers will continue to buy brands which they consider most relevant to their lives, and will drop other brands which are considered less relevant. This may require reinforcement of key brand messages, failing which consumers may shift to other lower-priced competitor brands or even to private labels in retail outlets.
Strip away non-essential costs
This is perhaps amongst the best periods of time when marketers can ruthlessly chop away non-essential costs from their entire value chain, to ensure that at least part of the input inflationary pressures are countered by cost reduction in other areas. Stripping away costs which do not provide adequate value to consumers, whether this be in areas such as packaging or distribution, are important at all times, but doubly important during an inflationary situation.
This can help limit immediate price escalations and will also make the brand a leaner fighting machine for the future. It is, of course, essential to ensure that such cost reductions do not dilute the core product offering, because this is a slippery slope that often tends to end in disaster.
Finally, while consumers are generally never happy votaries of prices going up, they must perceive the pricing actions implemented by the brand as being fair, based on their understanding of the context. Unfairness rankles with consumers, and ends up diluting brand loyalty.
(Harish Bhat is Brand Custodian, Tata Sons. These are his personal views)