Do prices decide elections?

Dear Friends,

In the latest edition of the Game Changer Expert Interview Series, BCG’s John Pineda describes the nature of value sharing and how the pricing decisions companies make can impact society. You can watch the full video here.

I recently joined Rohit Agarwal for his Strategy of Finance podcast, where we went into great depth on the topics of trust, fairness and value in pricing. You can access the podcast through your usual channels or watch the full video here.

Last week I didn’t publish a newsletter because of the Independence Day holiday in the United States. That means there are several other posts to catch up on since the last newsletter.

Improving marketing measurement: There is a lot of room for improvement in how companies measure the impact of marketing. Advanced analytics can change that. You can read the full post here.

Retail media’s untapped potential: Retail media has the potential to revolutionize how brands speak – and engage – with consumers, making it a powerful strategic tool in a marketer’s arsenal. You can find out more here.

Japan differentiates prices for tourists: To manage an unprecedented surge in tourism, Japanese attractions have begun to explore differentiated prices. Will it work? You can read the full post here. ?

Be careful at auctions: Several psychological factors conspire to lead people to bid higher at auctions. You can read the full post here.

Better use of customer data: AI and GenAI can help companies use their large amounts of customer data to achieve better market outcomes. You can read the full post here.

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When my Game Changer co-author Arnab Sinha and I selected the subtitle for the book, we settled on “How Strategic Pricing Shapes Businesses, Markets, and Society.” We consciously decided to include society because many aspects of social interaction – from wages to taxes to carbon emissions – are also prices in a direct or indirect sense. We also realized that the pricing decisions that businesses make can have a far-reaching collective impact on society. That impact is acutely apparent when a country holds a major national election.

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Do prices decide elections?

The national elections in France and the UK last week saw wins by left-wing parties, but amidst seemingly different political dynamics.

The French veered significantly leftward, giving the most representatives to the New Popular Front. This was an expression of disappointment with Emmanuel Macron’s centrist government and an attempt to avoid putting the far-right National Front in power after its recent win in the European election.

Last Sunday’s result leaves France with three political blocs of roughly equal size. But if you look beyond the left-right politics, a majority emerges after all. Two thirds of French voters were upset about inflation and blamed it on Macron’s government. The National and Popular fronts – despite being diametrically opposed – built their messaging around economic discontent about the high cost of living.

The British, meanwhile, gave a clear majority to the center-left coalition led by the Labor party. This creates a political landscape that looks more traditional, with a center-left party succeeding an incumbent right-wing party. But one important underlying reason for the shift in power was the same as in France: complaints about inflation and the high cost of living.

Why inflation matters so much to voters

In both France and Britain, high inflation has fueled stronger resentment against the incumbent parties than it did during previous episodes in the 1970s. One primary reason is that voters had grown accustomed to a period of low inflation over the past 30 years. Price increases of 1%-3% – spread over a large number of items over an entire year – were imperceptible on everyday items that cost less than ￡50 or €50. This glacial pace of inflation left absolute price levels frozen in people’s minds.

The post-COVID inflation burst, in contrast, raised prices for many day-to-day goods by 15%-25% or more in a relatively short timeframe. These changes were so perceptible for most consumers that they forced behavioral changes. As the newspaper Le Monde reported late last summer, rising food prices left consumers “no choice but to load less into their shopping carts, downgrade their purchased products and cut back on other expenses.”

Current inflation rates are now far below their peaks and declining, but voters are still complaining about high prices. They want prices to decline, not inflation rates. Prices have indeed come down in some sectors with dynamic pricing, but deflation is not a good sustainable economic path. No government will risk it, which means consumers will need to adjust to the higher price levels. In the meantime, we can expect them to express their dissatisfaction by voting against incumbent governments, whom they hold responsible for inflation in the absence of a narrative to the contrary.

It is too early to tell whether this will be a harbinger for how the US election plays out in November. Trump and the Republicans are certainly communicating heavily about inflation and the high cost of living, counting on voters to forget they share some responsibility for it.

How should companies respond?

Companies have several options to manage the overall public price perception, provide some tangible relief to consumers, and still balance their own financial objectives. They can start by looking for pockets of high price elasticity which offer opportunities to reduce prices, such as price-sensitive and highly competitive segments. Unless lower prices will cause or require structural changes, companies can lower prices with targeted promotions and programs.

They can also consider moving toward the Choice Game by offering alternatives at lower price points. Many have done it, but more can always be done. This is a viable strategic option for almost all companies except perhaps for players of the Value Game, where their differentiation and their record of value sharing protects them from “good-enough” competition.

Companies that sell highly visible consumer staples should prepare for further pressure from retailers and potentially from the government to push prices down. To prepare a proper response in anticipation of that pressure, companies should understand and monitor their costs very closely and develop crystal clear communication about the rationale for their prices.

Finally, companies with complex pricing structures should evaluate how effective those structures will be if they come under regulatory or competitive pressure. This pressure is a real threat, as demonstrated by the Biden administration’s highly publicized battle against what it refers to as "junk fees."

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