There's a movement afoot, and it can be seen in any number of areas. Companies everywhere are under considerable financial stress in this ever more turbulent global marketplace, struggling to meet the profit-performance expectations of analysts and shareholders.
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There are a couple of obvious ways to maintain profits in a market where costs are rising. Businesses can increase prices. Alternatively, they can look for savings in other areas to offset rising operating costs -- for example, in the production or delivery of their product and/or service offerings.
Whether a business increases prices or is able to lower the cost of goods, the ultimate impact of any decision is more likely to be felt by customers than by the company. In the end, customers keep companies in operation and provide a return on the shareholders' investments. Their thoughts, feelings, and reactions therefore should be paramount.
But when a business considers cost increases, are customers truly its main priority? Are they given serious consideration in the day-to-day actions and initiatives that the company undertakes? Or are their needs and wishes overlooked like a tattered poster that claims "Our Customers Are #1 With Us"?
Cutting costs, cutting corners
Companies have been exploring cost containment from many different angles. Some have sought to lower their production costs by substituting cheaper ingredients and adjusting their product recipes accordingly. For example, Hershey has reportedly substituted vegetable oil for a portion of the cocoa butter it uses in making some of its chocolates. General Mills has cut manufacturing costs for its Hamburger Helper brand by reducing the number of ingredient and spice pouches it provides to consumers and has replaced costlier pecans with less expensive walnuts in its Pillsbury Turtle cookies.
Some companies have maintained their traditional recipes but have been decreasing the volume contained in their standard packages. In the U.K., Tesco has begun selling non-standard bread loaves, substituting a 25% smaller loaf for the long-established 400-gram standard. Procter & Gamble has reportedly reduced the number of Pringles in a can and the number of diapers in a package, and Cadbury's family-size chocolate bars are now 20 grams lighter. Some McDonald's restaurants are now selling their double cheeseburgers with one slice of cheese instead of two. Marketers can avoid calling attention to price increases by maintaining the total package price and simply reducing its volume and/or size.
Perhaps this merely reflects what consumers want and are willing to pay for. Perhaps the consumer is concerned only about the total price of the package and cares little about the amount it contains or its particular ingredients.
Or perhaps not. In the 1990s, Campbell reduced the amount of chicken in its chicken noodle soup but found that its sales suffered and so vowed never to make that mistake again. The demise of Schlitz beer, a top-selling U.S. beer for the first half of the 20th century, is typically attributed to changes in the recipe and a reported (or rumored) substitution of cheaper ingredients. Product recipe or ingredient changes can have a negative impact on customer relationships, and as with Schlitz, the impact can be enduring.
Maybe what matters to consumers isn't the fact that changes happen, but rather their awareness of a change -- and the reasons for it. Some marketers, though, appear to be operating under the assumption that "what customers don't know won't hurt them." So they've set about making a sequence of minimal changes, although the result may be akin to the old story about the frog in the pot of water: The temperature is raised in tiny increments until, of course, the frog ultimately boils.
Maybe these sorts of recipe changes make no difference to consumers until they're pointed out. That's when alterations that seemed insignificant can take on disproportionate importance. The risk is that customers will feel shortchanged by a company and become suspicious of its unexplained motives. In the age of the ubiquitous consumer blog, it's a risky strategy to assume that changes won't be noticed and they won't really matter.
There is another route, of course -- one that involves raising the total price charged rather than changing the recipe or reducing the amount provided. When engaged customers have come to count on a consistent brand experience, it may be safer for marketers to raise prices than to chance generating a backlash by altering a recipe that passionate customers think of as sacrosanct. New Coke, anyone?
Prices on the rise
Raising prices may be unavoidable. The key to a successful price increase is when and how prices are raised -- and how those increases are communicated to customers. Consider the case of United Airlines. Its advertising lauds the quality of its brand experience, reinforcing the company's contention that "It's time to fly." Its Web site features United's commitment to "keep our customers feeling relaxed, respected, and rewarded." Meanwhile, the company has doubled the price charged for a second checked bag, announced flight attendant furloughs, and thanks to customer criticism, had to rescind its plans to begin charging for coach-class meals on European flights.
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Do United's customers feel "rewarded" by United's actions? United will contend that it's doing everything it can to control costs in a horrendously competitive market where fuel expenses escalate out of control and fliers are increasingly cost-conscious. Thus the company is reluctantly charging fees according to the services that each customer uniquely requires -- and is willing to pay for.
But United must pay close attention to its competition. After all, fliers typically have choices, and United's competitors also claim to be committed to providing customers with a positive travel experience. How are United's competitors, struggling with the same price-focused marketplace forces, evidencing their concern for the customer?
In fairness, United seems about on par with any number of other airlines. Along with the other legacy airlines, its ability to engage -- or not disengage -- its fliers likely hasn't changed much since 2001, when Gallup examined the degree to which fliers are emotionally bonded to the airlines competing for their business. (See "The Constant Customer" in the "See Also" area on this page.)
The real battle for airlines isn't to win customers for the next week or the next flight. The goal for an airline shouldn't be a customer who takes a one-time flight. The real goal is a customer relationship -- more specifically, an engaged relationship. (See "The Engagement Imperative" and "Stress Resistant Customer Relationships" in the "See Also" area on this page.)
But this seemingly commoditized industry does have a few standouts -- airlines that differentiate not just by what they promise but by how they perform and even how they price. As one example, while United raises its checked-baggage charges, its no-frills competitor Southwest trumpets its policy of no fees for a first or second checked bag. Thus, the lower cost flight option remains lower cost, and the price gap between Southwest and United seems to have widened.
Among the other competing airlines, Singapore and Qantas stand out by avoiding the appearance and reputation of charging more for the same -- or less. While United experiments with charging international fliers for meals, Singapore Airlines talks of offering amenity kits, in-seat power and Internet connections, 100 movies, 3-D games, and 180 TV shows -- in coach. Perhaps that's one reason Business Traveller Asia-Pacific readers have voted it "best airline" for 17 consecutive years. Qantas not only isn't charging coach passengers for meals, the airline has created snack and drink bars in the economy-class section and has designed extra leg space into its new A380 planes. In the words of the airline's interior designer, "It's a small detail, but it makes a difference."
Singapore and Qantas may well have different operating and pricing constraints than United. But, in the eyes of a flier considering a trans-Pacific hop in coach, which airline seems committed to enriching the customer experience? United's challenge is not just to recover its costs and keep the airline aloft financially but also to convince customers that its actions are designed to benefit them -- not just the airline. If the customer doesn't benefit, the airline won't either.
Two lessons
There are at least two lessons to be learned from the marketers who are endeavoring to cope with rising costs and increasingly cost-conscious consumers:
- When considering changes -- whether in price, product, policy, or service -- always look first through the eyes of the customer. Every change must be viewed and reviewed through that all-important lens. That's because every change has the potential to engage -- or disengage -- those upon whom the company's success ultimately rests. Any change that disengages customers may be sacrificing the company's future for the sake of a short-term financial bump.
- When making changes, make sure you let the customers know what you're doing -- and why. Bring the customers on board, and let them know where you're headed. Your engaged customers actually want you to succeed. If relationships are to endure, they must be reciprocal. Transparency is required because partners shouldn't be keeping secrets from each other.