Over the past few years, consumers have been hit with a steady stream of price hikes on everything from groceries to streaming subscriptions.

And more are coming: 55% of companies in a recent survey by the consultancy KPMG say they plan to increase their prices within the next six months.

Given significant customer backlash and the risk of losing business, companies are scrambling even more these days to find ways to justify the hikes.

To frazzled shoppers, of course, there’s no “good” answer that justifies sticker shock. But in some cases, economists suggest, a company may successfully justify a price hike if it’s presented as “fair.” For example, if management needs to offset increased business and operational costs – such as tariffs or rising health insurance premiums – customers may be more likely to understand such “cost-based” rationales.

Other companies take a different approach and make an argument, often backed by consultants, based on value: They inform shoppers that they’re getting a better product or service for the higher price. Netflix is one example of this approach, with the company’s executives openly advocating “quality-based” price increases as “virtuous cycles.”

As scholars of marketing, we argue that customers may find both approaches unconvincing. In a recent study, we found that a more rarely used justification – a “market-based” argument that emphasizes supply and demand forces and invokes scarcity – holds more sway over consumers.

What does this approach look like? If you tell customers demand is high and there are fewer competitors offering the same product or service, shoppers will assume it’ll be harder to find a comparable alternative. So they’re less likely to exit, despite the higher price.

More Bang For Your Buck Or More Profit?

In our study, we partnered with a Canadian self-storage company to see how different rationales for price hikes affected customer retention. Market-based justifications that focused on supply and demand and played up scarcity, we found, were the only type that prevented customers from moving out of their units in meaningful numbers.

The company randomly gave different customers one of the three different types of price-hike justifications. When they were told the price hike resulted from higher company costs or increased quality, the rate of “churn” – lost customers – was the same as not receiving a justification at all. But when customers were given the market-based rationale, they were 30% less likely to exit.

What explains this? In times of prolonged inflation, like today, cost-based justifications may not be seen as fair anymore. When every company points to higher costs to justify their own price hikes, customers typically see these explanations as empty excuses that are simply part of the problem.

When a business justifies higher prices by promising higher quality, by contrast, shoppers typically fall into two groups. Some are always looking for better quality and accept these justifications, so they’re willing to pay a higher price, provided the quality is indeed better. But an equally large segment of customers, who tend to be more price-sensitive, feel burned because they’re not looking for product or service improvements. They just want to keep getting the same service at the same price.

A market-based justification, by contrast, reduces consumer churn even though shoppers still view it as relatively unfair. The reason is that it creates perceptions of scarcity. If you tell customers demand is high and there are fewer competitors and substitutions, they’ll gather that it’ll be harder to find a comparable alternative. The expectation that switching will take more time and effort outweighs any perceptions of unfairness.

In other words, when customers believe they face fewer alternatives, they’re less likely to switch to a competitor even if they think the price increase is unfair. This is especially true when the customer already thinks there’s a shortage of good alternatives and when the dollar amount of the price increase is relatively low.

In today’s economic climate, companies should remember that fewer and fewer households are willing to pay a premium for added features. And many have grown skeptical of cost-based explanations. At the same time, they still want to avoid the hassle of searching for alternatives.

For companies with squeezed margins, the financial reality of frustrated shoppers burned by inflation and struggling with the cost of living makes these insights especially important.

This article is republished from The Conversation, a nonprofit media outlet that uses academic and research content. Read the original article: https://theconversation.com/shoppers-are-less-peeved-by-cost-hikes-due-to-scarcity-but-retailers-more-often-blame-their-own-rising-costs-287843