The recent upsurge in the cost of goods and services, owing to the recent inflation, has imposed pressure on businesses to increase the pricing of their offerings. Although this may appear as an obvious solution, in the current economic climate that is still grappling with the aftermath of the COVID-19 recession, it undermines consumers’ purchasing power.
While it is crucial for business owners to comprehend the shift in buyers’ purchasing powers, what’s even more vital is grasping the intricacies of factors that influence consumers’ decision-making regarding how and where they spend their money.
With the rise in the cost of goods and services, individuals are undeniably forced to adjust and re-evaluate their financial activities, making it essential for businesses to understand how this impacts their mental accounting process and, ultimately, their buying behavior. But what is mental accounting, and does it matter in the calculus of marketing?
Mental accounting refers to the mental processes and categorizations used by individuals to keep track of and organize their financial activities. It involves how individuals perceive and experience outcomes, make decisions, and evaluate their decisions afterwards. The mental accounting system provides inputs for both ex-ante and ex-post cost-benefit analyses and influences choices by violating the economic principle of fungibility. The effect of changes in purchasing power, such as those brought about by inflation, can also play a role in reshaping mental accounting and the decision-making processes of individuals and households.
For example, during times of high inflation, people may prioritize their spending: cutting back on discretionary expenses and allocating more resources towards necessities such as food and housing. They may also adjust their mental accounting systems, reevaluating their accounts and budget constraints more frequently in response to changes in the cost of goods and services.
As a result, businesses may see a decline in sales and revenue. However, businesses are not without solutions and there are ways that marketers can still design a marketing mix that appeals to consumers by catering to their needs. Here are five solutions for businesses to consider:
Smaller packages: Another way to attract customers is to offer smaller packages, , thus optimizing their budgets. This allows customers to purchase only what they need, which can help them stretch their budgets further. For example, a grocery store could offer smaller packages of certain items such as cereal, or a personal care products store could offer smaller sizes of shampoo or lotion.
Bundle deals: Another way to attract customers is to offer bundle deals. This allows customers to purchase multiple items at a discounted price, thereby providing a value proposition that incentivizes purchases. For example, an electronics store could offer a bundle deal of a television and soundbar at a discounted price, or a clothing store could offer a bundle deal of a shirt, pants, and shoes at a discounted price.
Customize packages by removing non-essential add-ons: Another way to attract customers is to offer more cost-effective packages by eliminating non-critical add-ons. This approach allows customers to purchase only the services or products they truly need, which can help them maximize their budgets. For instance, a service-based business could provide the option to opt out of add-ons that are not essential to the core service being offered, or a product-based business could offer the core product without additional features that the customer may not require.
Utilizing discounts and coupons as a pricing strategy: In the context of inflation, it is crucial for businesses to adopt innovative pricing strategies that effectively address the heightened price sensitivity of customers. One such strategy is the use of discounts and coupons, which can serve as a means of incentivizing customers to make purchases or reward loyalty. A grocery store, for instance, may offer a $5 discount coupon for purchases exceeding $50, while a clothing store may extend a 10% discount to customers who enroll in their loyalty program. These pricing strategies effectively tap into the psychological aspect of mental accounting, where customers are more likely to be influenced by tangible benefits in their purchasing decisions.
Increase efficiency: Lastly, businesses can also increase their efficiency to survive during inflationary times. Increased efficiency in business operations during inflationary times can lead to increased sales by appealing to customers’ cost-conscious behavior. As prices of goods and services increase, customers become more sensitive to prices and seek ways to stretch their budgets. By increasing efficiency, businesses can reduce the cost of production and potentially offer lower prices to customers. This can help to attract price-sensitive customers and increase sales, as they perceive the business to be providing more value for their money. Additionally, more efficient operations can also lead to improved customer experience, as they encounter a more streamlined and cost-effective shopping process. These factors combined can drive sales growth and help the business to thrive during inflationary times.
Inflationary conditions have a considerable influence on consumers’ behaviors and the macroeconomic landscape. By being proactive and nimble in their approach, organizations can weather the effects of inflation and maintain their customer bases, even potentially increasing their sales. It is imperative for companies to be adaptive to evolving economic conditions and identify ways to attract and retain their target customer demographic.
Isar Kiani, PhD, is a marketing expert and entrepreneur.
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