How to stop inflation from killing your customer experienceby
Inflation is soaring. And as business costs increase, so prices need to be raised. So what does behavioural science tell us about the psychological impact of price increases on customers, and what can businesses do to respond?
In the late 1970s, we had a 25% inflation rate. It was astronomical. Lately, in some of my experiences as a consumer, I feel a sense of Deja vu. Inflation is everywhere, from the gas pump to groceries to cars and real estate.
Inflation is also problematic for businesses. It is frustrating as a brand trying to control an image with customers while feeling pressure to raise prices and cut costs.
This situation is precisely what happened to one of our listeners, Stephanie, who wrote in with a Business Pickle, which is where our podcast listeners ask for our help with a business problem. Stephanie wrote to us to ask about what to do about a price increase regarding their customer experience. Since Stephanie is hardly alone in this problem, I thought I would share it here.
What we should all know about inflation
Before we dive into how you can maintain and improve your customer experience even during a price increase, it is essential to appreciate the role of inflation in the broader economy. People talk about inflation like it's terrible, but it isn't when the rate remains small and predictable. The Federal Reserve Bank (the Fed) in the US, which manages the economy, has an inflation target. You might be surprised to learn that they don't want zero inflation; the Fed wants about 2% inflation.
It would be best to have inflation at an economic level because it drives spending. If your money isn't slowly losing value over time, which happens under inflation, then there's no reason for you to spend it or invest it. If nobody's spending or investing money because it's more valuable for them to hold on to it, everything shuts down.
One of the problems with misunderstanding inflation leads to things like the cryptocurrency market. Cryptocurrencies like Ethereum and Bitcoin will only become valuable as currency when they slowly lose value over time. We don't want to spend the bitcoin unless the bitcoin is worth less tomorrow than it is today. However, many people are investing in these cryptocurrencies because, as an investment, they expect it'll increase in value over time.
Understanding inflation is essential for understanding the economy and how things operate. So, in short, it's not bad. It only gets bad when it gets out of control…
…and that's where people start to worry that we're headed right now.
Inflation raises the roof
I have an example that highlighted the problem of inflation for me at a personal level. We need to replace our garage roof in England, which we have known for some time. We even got a quote nine months ago but didn't act on it. Finally, we decided we needed to and phoned up the bloke that quoted it to us. He said he could do it, but the price had gone up.
My initial reaction was dismay. Also, I was more than a little skeptical that it was a materials' price increase driving the change instead of an opportunistic contractor. However, upon further reflection, I decided that he was likely telling me the truth based on the prices of everything else these days, and we are getting the roof done for a much higher price than it would have been last year.
Part of my initial skepticism stems from a lack of certainty. When an economy is in a state of inflation, there are economic repercussions and an erosion of trust. We have heard that inflation will peak, which is excellent news. However, we don't know if prices will go back down again. Moreover, inflation can beget inflation, and inflation fears can generate inflation, too. The uncertainty piled on top can spiral inflation anxiety out of control.
The psychological effects of price increases for people
As you might be aware, we haven't had inflation rates rising dramatically for several decades. This perception is misleading, though. Inflation rates have been low in many areas, but not all areas. For example, carbonated drinks have only had an average increase of 2.29%. However, over the years, that price is now 170% higher in 2022 than it was in 1978. By contrast, the cost of higher education (6.27% year over year and 1446 % higher in 2022) and housing (4.16% year over year and 842% higher than 1967) have had significantly higher increases.
So, why are people willing to suffer inflation in some areas and not others? The answer could be in framing. Some costs are distant for us, like housing. We buy once in a while, not all the time, so the steep increase is not a consistent experience. However, buying groceries is something we do all the time, so those changes seem larger.
Diminishing sensitivity plays a role, too. For example, when you buy gas, you are standing outside your vehicle in the weather, watching your total spin by, getting larger and larger as it leaves the pump and fills your tank. Since we experience the spending so viscerally, we notice those price changes more.
We don't have the same experience with our thermostat at home, even though a thermostat operates as a gas pump. After all, the dollars are adding up the same way as the furnace or air conditioning unit burns energy to heat or cool your home. The difference here is that the price is a distant one. We don't see it adding up like on the gas pump. If we did, you can bet some people would invest in down jackets in the winter or turn on a fan in the summer rather than crank the thermostat up or down.
Another influence here is Mental Accounting, which describes how we categorise costs. So, you might know a gas station across town is ten cents cheaper per gallon, which amounts to $2 every 20 gallons. However, when you consider the cost of the gas you will burn to get to that savings, are you saving any money? In this example, mental accounting is the difference between wasting the money on the gas you already bought vs. the money you would save on the gas you want to buy. Of course, it's all gas money, but saving that $2 by driving across town seems like a good idea, even if it costs over $2 to do so.
How organisations respond when the chips are down is essential
Stephanie asked us to help her manage this situation for her company. My first and overarching advice is to keep their response to the current business environment as customer-centric as possible. Unfortunately, few organisations are doing so at the moment.
For example, I'm already seeing organisations respond to inflation by cutting costs. But, of course, the cost-cutting happens in what the organisation perceives as the unprofitable bits. Unfortunately, those cuts tend to fall in the customer service group, like the call centre.
This short-sighted customer strategy drives me around the bend! It probably aggravates you, too. How do you feel when a call centre recording says they are experiencing "an unusually high volume of calls?" To me, that message says, "you will experience a long hold time because we cut staffing to the contact centre to save on labor costs."
Some other organisations are taking an equally frustrating tack. These firms use the present inflationary environment as an opportunity to raise prices. They're not being transparent about it, either. The price goes up; no explanation is given. This move is equally poor to cutting costs in the customer service department. Hoping your customers won't notice a price increase is not a customer-centric strategy. It also erodes their trust in your brand.
So, what should Stephanie (and you) do?
This second group presents an opportunity for Stephanie and other companies like hers that want to do a better job with a price increase at a time like this. The answer could be in the behavioural sciences concept of Framing. How you present the price increase is a crucial part of managing this problem for your organisation.
Also, demonstrating transparency about what is happening builds trust. For example, explain what is happening in your supply chain or how rising fuel prices have increased your costs. Tell customers why the price is now higher, and you have a chance of lowering their disappointment with you.
We also think that taking a long-term view rather than a short one is essential. Make concessions as you need to and avoid thinking about the margin you are losing. The long-term value of keeping that customer is more valuable than that immediate loss. Moreover, taking the time to explain and create win-wins will build your relationship, which is essential when times are tough.
It's not easy for anybody right now in business. Inflation is influencing everyone and not in good ways. Like Stephanie, you might be facing some tough choices in your organisation, too. Whatever you decide to do to respond to the environment, make sure that you roll it out to customers in the most positive framing you can while being transparent about the reasons behind it. Building trust with your customers is always a sound customer strategy, especially when they are paying more for the pleasure of being your customers. Moreover, they might be willing to give you the benefit of the doubt, which is something no untrustworthy business is going to get.
Colin is Founder & CEO of Beyond Philosophy LLC who help organizations grow by improving their Customer Experience and identifying hidden unmet needs. As a result, the Financial Times selected Beyond Philosophy LLC, as one of the best management consultancies for the last two years.
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