Article

Is price the only 'P' that matters?

Convenience-based value propositions are losing their appeal as people are repricing their free time.

April 30, 2009

As consumers and retailers settle into the new frugality, IRI reported earlier this week on the emergence of a new generation of Americans — the Downturn Generation. As shoppers, this generation is adopting practices similar to Depression-era shoppers, implemented both to weather the recession and to keep a close eye on spending long after the recession ends. This marks a dramatic change in how consumers shop and what they buy.

When people lose their jobs, they value their time differently. In today's economy, convenience-based value propositions are losing their appeal as people are re-pricing their free time. In fact, IRI found that "65 percent of shoppers reported that price is becoming more important than convenience in their purchases."

But how do they know when a price is a good deal? In conversations with homeowners in December, it was clear that they are well-aware of the current price of items they buy regularly. Under those circumstances, consumers are generally able to evaluate an offer, and know when they are being overcharged. This may be changing.

The New York Times recently published an article about today's consumer mindset, the title of which says it all: "Never Mind What It Costs. Can I Get 70% Off?" The point of the story is that consumers are numb to 50-percent-off offers, giving rise to a vicious cycle of discounting to motivate a purchase. Trouble is, this type of downward price spiral does not build loyalty. In fact, it's the opposite of loyalty — it rewards customers for being fickle. And it requires retailers to reorient their value chain to make up for what they lose on the top line by selling more. While many have famously commented "we'll make it up on volume," few have actually succeeded.

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Enter Starbucks into the fray. The brand that brought us the idea if not the reality of the Italian café experience has been criticized for the high price of its lattes and high calorie count of its frappaccinos and under siege from McDonald's and Dunkin' Donuts, among others.

Today, the retailer begins a campaign to combat extreme price pressure and the expected media blitz behind McDonald's McCafe launch. The headline warns readers to "Beware of a cheaper cup of coffee. It comes with a price." According to Starbucks CMO Terry Davenport and reported in an article in the May 1 issue of AdAge, "The ads lay out what separates Starbucks from the competition, such as its practice of buying fair-trade beans and providing health care for employees who work more than 20 hours a week."

Are people today more sensitive to the need for worker benefits like health insurance? Do mass market consumers value the efforts employers like Starbucks and Costco make to provide coverage to part time workers? Do they make the connection between the price they pay and the company's ability to afford coverage? Two years ago, the answer would have been "no." Starbucks is taking a page from the Obama campaign. It may give us a chance to see whether this recession has changed these perceptions. Kudos to Starbucks for trying.

Judy Hopelain is a consultant withBrand Amplitudeand abloggeron the topic of retail experiences.