Sunday, May 3, 2009

Too Cheap to be Good? It Can Happen in Food

The recession grinds on and people continue looking for ways to save. Meanwhile, brands are trying to entice new customers to give them a try and to get past customers to buy again. Discounting is rampant in cars, shoes, hamburgers, cruise vacations, the high end, the low end – pretty much all around us.

The LA Times reported last week on the Fast Food Wars. Both KFC and Pollo Loco were giving away free food -- to introduce new products in KFC’s case and to increase trial in the case of Pollo Loco.

As the article points out, it’s not clear how attractive the customers are that find heavily discounted or free offers appealing. Here’s a flash – they tend not to be brand loyal. This may seem obvious, but the path to retail bankruptcy is littered with brands that were going to make it up on volume.

It's not only likely that KFC and Pollo Loco are attracting unprofitable customers. In addition, they may be turning off their loyal customers by devaluing their offering. And the potential lost revenues from these loyal customers are far greater than the potential gains from switchers gained through low price promotions.

Recent research with consumers, we found that there is a price below which people become suspicious of product quality. For brand-loyal canned goods customers, the magic number is $1.00. Below a dollar/can, these shoppers suspect the product can’t be any good. They buy the brands they buy and pay what they cost because they think they’re better. That’s one of the main advantages of having brands.

How does that jive with recent reports from Procter and Gamble that volume is off for major brands like Tide and Swiffer? To state the obvious: Food is not a cleaning product. Consumers may be willing to cut back on the latter before they cut back on the former. Second, there is something potentially nostalgic about canned goods. It’s possible consumers are stocking up on them as a way to reconnect with simpler times. Another possibility: smart home chefs are using canned goods to bulk up their home cooking, for example adding canned olives or canned chopped tomatoes to soups or chili or pasta sauce.

Whatever the strategy, it’s worth it for retailers, including fast food chains, to pay attention. Pricing too low can lead to greater lost sales than pricing too high.


Bruce Sanders said...

The connection between the consumer's perceptions of relative price and relative quality has been well-documented. Even an identical product is seen as being of inferior quality if the price point gets too low. When it comes to food and our current economic situation, the connection can be quite legitimate for the consumer to make. The product may not, in fact, be identical. Restaurant owners, including fast-food retailers, recognize the need to cut prices, and at least some are doing it by reducing the quality of the ingredients. But as you point out, Judy, the ultimate price reduction—-to free—-by KFC and Pollo Loco was designed to build loyalty. Inferior food won't do that job.
From my perspective as a consumer psychologist, I'm thinking that how the price reduction is framed for the consumer will make a big difference. Labor union leaders are selling members on wage and benefit concessions by framing the concessions as shared sacrifice. I suggest retailers shout it out that any truly dramatic price reductions are designed to aid the retailer's customers and employees during extremely tough times. Then those retailers increase their chances of maintaining the brand image of both their product offerings and their businesses, while building loyalty through consumer gratitude.

Judy Hopelain said...

Thanks for your comment, Bruce. I agree that these days more than ever businesses have to put a context around their pricing decisions - whether they are reducing price or not. That's exactly what I think Starbucks is trying to do in its new ad campaign. It's what President Obama is doing with the budget.

As economists like to say, pricing is sticky downwards, meaning that once prices go down, it's hard for a business to raise them back up. So, I would recommend lowering price very carefully. As the economy improves, we may see a whole lot of brands and retailers leave their price-reduced products behind and launch repositioned versions at new, higher, more profitable price points.