When is enough enough? When it comes to price increases in the current economy, it might be today, as consumers increasingly demonstrate their unwillingness to keep supporting price increases on their favorite products. Across a range of product domains—from quick service meals to home improvement items to pet food to ketchup—companies are realizing that people are switching away from their more and more expensive offerings, in their attempts to survive the seemingly endless increases in the cost of living. In the past few years, inflation has been notably high, reaching nearly 10 percent in 2022. Although it has slowed somewhat, reflecting intense efforts by federal regulators, it continues to sit at around 3.1 percent. That is, prices might not be jumping quite so intensely, but they’re still rising. Such trends also affect companies, which must pay more to procure the raw materials they use to create their offerings. But whether and the extent to which they should pass those costs on to consumers represents a strategic and critical choice.

A quick survey of companies that have taken distinct approaches to their pricing offers pretty clear evidence that the ones that insist on the highest price increases are losing out to those that have raised their prices more moderately. For example, in the past two years, Kraft Heinz increased prices on its various consumer packages goods by 14.2 percent, followed by a 2.5 percent jump. In turn, it was forced to admit to a 7.1 percent decline in its annual sales. At General Mills, the sales decrease for its various pet food brands was about 4 percent, forcing executives to acknowledge that the company “had overestimated customers’ willingness to pay higher prices for dog treats.” 

Whereas during and immediately following the pandemic, home improvements stores enjoyed record profits, as people actively sought to enhance their living spaces, those trends have come to a halt. Consumers seek more limited and reasonable options, to match their limited budgets. In turn, Home Depot has been working to moderate its price increases, enabling it to maintain its performance, even if not quite at the level it achieved a couple of years ago. Shake Shack similarly learned its lesson, such that it only increased prices by 1 percent in the past year, following a 7 percent jump in 2022. Once it did so, both its sales and its store traffic numbers rose. In contrast, Baja Fresh noted a nearly 1 percent decrease in same-store sales, due to its seeming determination to keep prices high. 

But such determination might not be possible for much longer. Alternative approaches are required, including greater and more precise price discrimination based on consumers’ willingness to pay. For example, Netflix has added a lower-cost subscription plan for viewers willing to watch a few advertisements during their streaming session, while McDonald’s has introduced some higher priced options like the Double Big Mac for those diners willing to pay more for a bigger burger. At the same time though, McDonald’s has acknowledged that for lower income consumers, who have long represented a key target demographic, attracted by its famous dollar menu, its appeal is diminishing. The company CEO thus promised to expand its attention to developing affordable options, especially in response to consumers’ complaints (shared on social media, of course) of having to pay $7 for an Egg McMuffin.

Discussion Questions

1. If you were advising a restaurant retailer, how would you recommend it deal with continued high prices for its materials?
2. Have you changed your consumption habits, due to continued price increases?

Sources: Brian Cheung, “Consumers Are Tired of Price Increases. Big Brands Are Paying Attention,” NBC News, February 21, 2024; Melissa Repko, “Home Depot Beats Earnings, Sales Estimates Even as Consumers Take on Smaller Home Improvement Projects,” CNBC, February 20, 2024; Christine Romans, “Fast Foodies Are Getting Fed Up with Price Hikes at the Drive-Thru,” NBC News, February 7, 2024