How to communicate cost-justified price increases?
Price increases, especially cost-justified increases, are inevitable. But in a price-sensitive market like India, rising prices can lower sales as consumers seek to tighten their belts. To avoid this issue, retailers can present both the cost increase and price increase as percentages. As long as the price increase percentage is less than the cost increase percentage, buyers will perceive the increase as fair. However, buyers should also note that differing base values for cost and price mean that the firm might still be increasing its profit margin despite the perceived fairness of the price increase.
The average price of atta rose from ₹ 29.14 per kg in May 2021 to ₹ 32.91 per kg in May 2022.
Parle-G, the popular glucose biscuit, took a price hike of 6-7 per cent in November last year. The rising prices of most products and services are hard to ignore, especially in a price-sensitive market like India. Often these increases are driven by cost increases and are unavoidable, yet retailers and manufacturers face a fall in buyer purchase preference and consequently sales when the price of a product goes up.
Manufacturers counter this by adopting shrinkflation, where they reduce pack sizes or
quantities in packs while keeping prices (or pack sizes) constant. However, consumers are getting wise to this tactic and regulators are also insisting on more transparency. A study looks for a solution to this issue by answering the question: How can retailers communicate price increases without affecting buyers’ purchase intentions?
The study found that a dual-percentage numeric frame (a statement mentioning both the cost and price increases in percentages) leads to a higher perception of fairness among buyers. As against this, alternative numeric frames (frames that mention amounts of money and/or qualitative remarks or just the price increase in percentage terms) lead to lower perceived fairness in the price increase.
For example, the comment “The price of this pressure cooker will increase by ₹ 500 because
of a cost increase” uses a monetary amount for the price increase and a qualitative remark for the cost increase. Buyers might suspect it to be a ploy. On the other hand, a comment such as “The price of this gas stove will increase by 10% because of a 10% increase in cost of production” might give buyers a greater sense of fairness.
A buyer’s perception of the fairness of the price increase depends on whether they feel that
the increased price will add to the firm’s profit or not. Cost-justified price increases are usually believed to not increase a firm’s profit and so are perceived as fairer. However, the fairness perception depends on whether the price increase percentage is more or less than the cost increase percentage. Buyers perceive the price increase to be fair only if it is lower than the percentage increase in cost as they see it as the firm maintaining its income levels.
This perceived fairness results from most buyers not paying attention to the base values for the cost and price increases. For instance, if the cost increase is given as 5% and the price
increase is given as 3%, a buyer might find the price increase to be fair as the price increase percentage is lower than the cost increase percentage. But if the base value of the cost is ₹ 100, while the price is ₹ 180, the actual increases are ₹ 5 (in cost) and ₹ 5.40 (in price). That is, the price increase is more than the cost increase in absolute terms, but the buyer may not realise that because of neglecting the base values.
This study has relevant insights for both retailers and consumers as well as policymakers. Retailers can use dual-framing of percentage increases to communicate their cost-justified price increases to buyers. Doing so will help maintain purchase intentions, especially when the price increase percentage is lower than the cost increase percentage. This technique is cost-effective and easy to implement as well.
On their part, consumers need to be more aware of the implications of such percentage
increases. Just because price increase appears to be fully justified because of cost increase does not mean such is the case. Buyers must carefully understand the difference in price and cost increases by keeping the base values and profit margins in mind to avoid being misled. Consumer forums and other relevant authorities can also take note of the bias that leads to perceived price fairness in such cases and implement regulations to protect consumers.