Why Consumers Are Willing to Pay More for Some Brands
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Here's your Money Briefing for Friday, June 10th. I'm J.R. Whelan for The Wall Street Journal.
How does inflation change shoppers' choices between brands and cheaper alternatives?
With inflation at levels not seen in four decades, shopping can be a painful experience. But consumers seem to be willing to pay rising prices for the brands they like.
And what we found is that in some industries, there was a strong positive correlation between two variables. And that means when net profit margin goes up, customer satisfaction actually goes up.
On today's show, we're joined by Rick Wortsman, head of the K.H. Moon Center at the Drucker Institute. They study this phenomenon, why some brands can raise prices without alienating their customers and others can't. We'll talk to him about the mindset of consumers in inflationary times. That's after the break.
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With inflation at levels not seen since the 1980s, shoppers face tough choices when trying to stay within their budget. Do they stick with a brand they trust, regardless of price, or go with a cheaper alternative to save some money? And that presents a tricky question for companies. Do they pass along higher costs to consumers and bank on their loyalty, or hold prices steady, which could chip away at profits? Rick Wartsman heads the K.H. Moon Center at the Drucker Institute, which studied the tap dance between consumer spending power and manufacturer's pricing power. Rick, thanks so much for being with us.
Oh, pleasure.
So, Rick, we often hear about the power the consumer has in fueling the economy, but what challenges do companies face in not angering them with higher prices?
Look, all companies want to cultivate in their customer base a kind of brand loyalty. But companies come at it in different ways. And what we found in our research is that some industries are better positioned than other industries to pass along price increases, generally speaking. It varies, of course, company to company within that industry, but generally speaking, some are relatively well positioned and some have to be warier about passing along price increases.
Okay, so where has your research shown that consumers are willing to pay higher prices?
Yeah. So what we did in our research is we looked at the correlation. So kind of a statistical relationship between companies across different industries. And the correlation was between their net profit margin. Right. So how much profit they are earning as a percentage of their total sales and their customer satisfaction. We measure that. customer satisfaction as part of our annual company rankings. And what we found is that in some industries, there was a strong positive correlation between those two variables. And that means when one goes up, net profit margin goes up, customer satisfaction actually goes up. What that suggests is that those are industries that by and large are reinvesting some of that profit back into their relationship with customers.
They're innovating, they're providing better service and so on.
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