June 22

[Nugget #20] Pricing in Times of Crisis (part 1): Why Customers Are More Price Conscious

During economic crises people look twice at the price (figuratively). Consumers becoming more price sensitive might be obvious and expected. You can probably relate. But why is that? At least in my case, a bit of self-reflection agrees with what research has found. But let us start with looking at the crisis first. It is already bad...

Consumers’ budgets shrink dramatically as the economy faces a severe downturn worldwide. According to a recent survey conducted in the US1, more than half (51%) of the working US population lost more than a quarter of their income. The outlook remains pessimistic: 53% of American consumers expects a global recession in the post-COVID-19 period.2

How do consumers react to the current crisis?

In times of crisis, consumers become more sensitive to prices.3 Price sensitivity refers to how much do consumers focus on paying low prices in their purchase decisions. More price sensitive (also ‘price conscious’) customers ask for discounts, look for lower-priced alternative brands, switch to discounters, shop less in one product category and more in another, and postpone major purchase decisions.4 Recently surveyed US customers1 indicated that they spend more on essential items such as health and hygiene (43%), household cleaning products (40%), and food and drinks (31%). On the other hand, customers cut back on discretionary items such as clothing (49%), hobbies (26%), and home entertainment (19%). At grocers and retailers, customer also favor store brands over national brands reflected in a 27% higher revenue growth of the former over the latter.5 Overall, in May 2020 total retail sales declined 6.1% compared to last year.6

These changes in customer behavior have a tremendous impact on brands and retailers not only during recessions: these changes likely affect shopping patterns of customers also in the long-run “leaving permanent ‘scars’ on national brands’ performance level”7 in post-recession periods.

The question for businesses is why consumers become more price sensitive?

Customers becoming more price conscious during turbulent times might be intuitively obvious, but research in psychology and psychological pricing helps to dig deeper. More precisely, researchers identified three drivers that explain a higher level of price sensitivity during economic downturns.8

The first driver is feelings of anxiety about the financial future. Customers might hold a pessimistic outlook of their financial future. They vividly see the consequences and problem that lower financial means create for them and their dependents. These expectations develop feelings of anxiety and worry about money. To cope with anxious feelings, customers spend less and become more price sensitive. This behavior works as a mechanism of prevention as it helps to increase savings for the bad times ahead customers expect.

The second driver is feeling guilty when spending money. Customers anticipate guilt when they expect that their action will be against their internal moral compass leading to an unpleasant state. For example, customers might feel guilty when they know that spending money on nonessential, luxury products is wrong because it might increase the financial hardship for themselves and for those depending on them, like family members. Furthermore, spending money on luxury items feels inappropriate in times the customers’ social circle goes through a financial crisis. The social norm pronounces financial prudence and frugality. Violating this new social norm also causes feelings of guilt.

The third driver is the need to feel as “smart shopper” spending his/her money wisely. In particular during in recessionary times, customers feel proud about a good deal when shopping. Price savings offer a (psychological) reward to buyers through shopping which contributes to customers’ pride, sense of accomplishment and self-esteem. Even if customers are not financially affected by the economic crisis, conforming to the social norm of frugality with “smart shopper” behavior still offers intrinsic rewards. At least it avoids painful feelings of violating this norm.

Wrapping up

We understood that customers become more sensitive to prices during economic downturns, and we learned that more price conscious customers change their purchasing behavior with severe consequences for retailers and brands. Digging deeper on price sensitivity, we found three psychological factors that explain why customers become more price conscious during economic crises.

What does this mean for businesses?

In general, the goal of pricing and price communication during times of crisis is to make customers feel less anxious about their financial future, reduce guilt of spending money, and invoke a self-image as a “smart shopper”.

In the upcoming Pricing Nugget we turn to pricing strategies and tactics during times of crisis that aim at this goal.

This Pricing Nugget is based on the new whitepaper "Pricing Advice in Times of Crisis". It takes the theory from the academic research summarized in the whitepaper and reflects about it in light of actual statistics on customer behavior displayed in the current crisis. 

References

  1. Statista (2020). Statista Survey “COVID-19 Barometer 2020”, survey time period March 23 to May 31, 2020.
  2. EY: Carlyle, Julie and Silvia Rindone (2020). Future Consumer Index: How COVID-19 is reshaping UK consumer behaviours. https://www.ey.com/en_uk/consumer-products-retail/how-covid-19-is-reshaping-uk-consumer-behaviours [last accessed June 22nd, 2020]
  3. McKinsey: Alex Abdelnour, Todd Babbitz, and Stephen Moss (2020). Pricing in a pandemic: Navigating the COVID-19 Crisis. https://www.mckinsey.com/business-functions/marketing-and-sales/our-insights/pricing-in-a-pandemic-navigating-the-covid-19-crisis[last accessed June 22nd, 2020
  4. Husemann-Kopetzky, Markus (2020). Whitepaper “Pricing Advice In Times of Crisis”. https://psychologyofpricing.com/
  5. Ochwat, Dan Ochwat and Seth Mendelson (2020). Nielsen reports huge store brand gains during coronavirus. https://storebrands.com/nielsen-reports-huge-store-brand-gains-during-coronavirus [last accessed June 22nd, 2020]
  6. United States Census Bureau (2020). Advance monthly sales for retail and food services, May 2020.
  7. Lamey, L., Deleersnyder, B., Dekimpe, M. G., & Steenkamp, J.-B. E. M. (2007). How Business Cycles Contribute to Private-Label Success: Evidence from the United States and Europe. Journal of Marketing, 71(1), 1–15.
  8. Hampson, D. P., & McGoldrick, P. J. (2017). Antecedents of Consumer Price Consciousness in a Turbulent Economy. International Journal of Consumer Studies, 41(4), 404–414.

You may also like

Never miss a Nugget.

We screen new research and academic papers for you and carve out the nugget within. Get them straight to your mailbox once we uncovered and polished them.

>

[NEW] whitepaper "Pricing Advice in Times of Crisis"

Digest of 50+ studies explains how customers' behavior change and how companies should adjust their pricing during economic downturns.