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Inflation Solution: Charge Less?
Every gas station in the town offers fuel at close to the national average, $5 per gallon—except for one, which is selling it for $4.50. What a deal! A line of cars winds around the corner. In just a week, customers have quietly abandoned their usual gas stations and flocked to the one with underpriced gas—grabbing thousands of full-priced drinks and snacks while they’re there.
This scenario is unfolding in towns around the world. Smart firms, big and small, are reaching for strategies with inflation spiking (currently it’s at 8.6%) and interest rates predicted to leap higher. The leadership challenge is to move forward with a purpose that offers customers an olive branch—while still boosting business. This summer, experts say, a range of stakeholders will be watching corporate leadership. “The best judge of someone’s character is not how they act in the good times, and that’s true of companies as well,” says Divina Gamble, senior client partner and Washington, D.C., office managing partner at Korn Ferry.
For items in high demand, a firm’s impulse is to raise prices—which consumers may read as opportunism. Many families are struggling to afford essential items. The costs of items like bread and eggs have risen as much as 25% in the last year, and pricing has taken on a new meaning for customers. “If a brand wants to be known for being purpose driven, especially on essential items, they need to weigh the short- and long-term game,” says Gamble. For example, she suggests, firms should provide full transparency when they do need to raise prices—detailing not just how much, but also why. This, not price gouging, will build loyalty.
Of course, “loss leading,” as the strategy is known, is risky. Whatever the product, holding off price jumps when costs are skyrocketing can backfire: a firm can lose money or be outlasted by a competitor that can sustain low prices for longer. And too many sales or discounted products draw consumer attention to deals rather than to brand promise and experience. Loss leading works particularly well with products that are both “in incredible demand and a high point of customer frustration,” says Ann Vogl, senior client partner in Korn Ferry’s Marketing Officers practice. These include gas and baby formula, or in recent years, meat and toilet paper.
Loss leading doesn’t just drive foot traffic, it builds good will, says Craig Rowley, a Korn Ferry senior client partner who specializes in retail. “For retailers to say that they understand customers’ pain, and are going to work really hard to keep essentials affordable for you—that’s a great story,” he says, noting that a consumer’s appreciative memories may last far longer than inflation does. He suggests that firms can make up the difference with other, non-essential items. This strategy is currently on view at Costco, where sales of cheaper gas have jumped by approximately 20%—and foot traffic has increased as well, due to gas purchasers who figure they might as well buy some groceries while they’re there.
The difficult market offers other opportunities for attracting customers, say experts. Customers will be more appreciative of loyalty programs, which are a strong way to communicate with them digitally, says Denise Kramp, senior client partner in Korn Ferry’s Global Retail and Consumer practice (in fact, she adds, customers will be generally appreciative of any efforts at all that ease their stress). Other appealing options include quick curbside pickup—which thrills customers working long hours or taking on more childcare—and free shipping. “We initially thought that curbside pickup would be a COVID service, but it can also be a response to inflation pressures,” she says.
Not doing anything can backfire at this point, says Rowley. “Competitors are changing course, and you’re not,” he says. “Once consumers get used to shopping at new places, it’s hard to get them back.”