Inflation, Sustainability and Consumer Behaviour

High inflation rates have persisted for quite some time now. As a result, inflation affects both (a) how businesses operate in a high inflation environment and (b) how consumers respond with their purchase decisions.

Rising prices
Photo by Monstera: https://www.pexels.com/photo/graph-with-increasing-euro-profitable-investment-6289026/

In an inflationary environment, businesses face higher costs due to increased input prices. Staff costs rise too as the company needs to compensate people for a higher cost of living. Nominal interest rates raise the cost of borrowing. While all costs are rising, businesses have limited capacity to pass on the cost increases. While the worker (who is also a consumer) receives higher wages, she does not get fully compensated for inflation. Thus, the worker or the consumer sees an effective reduction in her purchasing power. With tight demand, higher prices will only drive away the consumers. Add to this chaos consumer preference for sustainable products. 

A study by GfK indicates that about 80% of consumers globally say that sustainability remains important to them. At the same time, about 30% of Europeans, 40% of people living in the US and 50% from developing Asia indicate that they will put their own economic security and wellbeing before environmental problems.

This makes reading the situation confusing. So what’s a company to do?

Finetune your messaging: Undertaking sustainable actions is not enough. These actions need to be communicated credibly too. Communication without action is easily caught out and can cause irreparable harm. For instance, if you are an appliance manufacturer, help the customer understand your repair and refurbish programme and make it easy for them to avail of it. Or, prevent food waste by providing discounts near expiry dates. Provide net zero labels that are easily visible or communicate net zero credentials powerfully on other mediums. 

Build core sustainability capabilities: The customer’s view on sustainability has shifted from “cleaning up” to “saving the planet” – given the magnitude of the problem and increased awareness of sustainability issues. Thus, companies will need to continue to build a strategic focus on sustainability. Then, when inflation ebbs, the company will be ready to cater to customers opening up their wallets.

The opportunity for sustainable products is immense. Increase their perceived value, ensure its effective use and create compelling communication to build trust with the consumer.

Published by Utkarsh Majmudar

Utkarsh Majmudar is a Fellow, IIM Ahmedabad and a professional with experience encompassing academics and administration at top business schools in India (IIM Lucknow, IIM Udaipur, and IIM Bangalore) and working with large corporations. His interest areas include corporate finance and CSR.

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