To Spend, or Not to Spend? New Research Reveals Consumer Value Perceptions

Medallia Market Research uncovers how today’s consumers think about value in a few key industries, such as retail and hospitality.

Our recent research of over 1,800 U.S. consumers, How Consumers Think About Value, reveals several unique findings on how consumers weigh price against experience, product quality, and other factors in making purchase decisions for brands like retailers, restaurants, hotels, and airlines.

Does price sensitivity mean brands should focus on being the cheapest?

Consumers choose many brands because they have the lowest prices. This can vary by industry, with retail and airline customers more commonly picking the cheapest option (60% and 59% of most recent cases, respectively) than hotel and restaurant customers (43% and 41%, respectively).  

However, there’s plenty of good news for brands that anchor their competitiveness on quality and experience over price. More than half of consumers are inclined to pay more for a better experience. This reveals that differentiation based on premium attributes like high-quality service and superior products can drive many brands to success, even if competitors win on cost.

Even in the face of inflation over the past few years, the “consumer surplus” (what consumers are required to pay versus the dollar value they put on what they receive) is still alive and well. For many industries, over two out of three consumers would have paid more than they did on their most recent transaction if the price was higher rather than abandoning the purchase altogether. This helps explain why consumer purchase frequency did not drop as much as many expected, even as prices rose dramatically.

However, consumers being willing to pay more doesn’t automatically give brands permission to raise prices and expect volume to stay where it is. Consumers can still turn to competitors with lower prices (and get even more surplus value) when products / services are undifferentiated. 

This should force brands to think hard about the quality of experience that justifies the price being where it is. It also means we need markets in which brands can’t collude to raise prices in concert and hurt the consumer, who is left without other options.

Just like industries differ in how often consumers choose the cheapest option, not all industries are equal in their willingness to pay more if needed. When a consumer transacts with one industry, it may more often be a “need to have” than a “nice to have” compared to other industries. That further underscores the need for brands to have the right data to know why consumers choose them and how fragile that choice might be.

Considerations for the retail industry

Drivers of choice for one retailer over another may be very price-dependent, even more than drivers of choice in other industries. 

However, retailers would be missing a critical element of consumer behavior if they didn’t recognize the “shift to convenience” that drives consumers to consider price in the context of many other convenience attributes — like location, variety, channels, return policies, payment methods, and many others. 

When taken together, these can easily outweigh the attractiveness of low prices, even if each nuanced component of convenience doesn’t on its own. This explains why 40% of retail customers most recently chose an option that wasn’t the cheapest.

When shoppers seek better prices, what they are really doing is trying to drive more “surplus” for themselves. Remember that the difference between price and value is surplus, so by definition, a lower price drives a higher surplus. However, improved experiences via convenience and quality can drive that higher surplus, too. 

The fact that price is as strong a driver as it is also reveals how opportunities exist for some retailers to further differentiate themselves on attributes other than price — essentially zigging while others are zagging.

Measurement is critical alongside this finding, too. Every brand will index differently on the surplus drivers. Just like an “impact score” helps brands understand which topics drive scores, analyzing the factors that best drive perceptions of a surplus between value and price can do wonders for helping a brand understand its positioning in the market and adjust if needed.

Considerations for the hospitality industry

The travel and hospitality industry offers a unique lens through which to observe consumer value. While price sensitivity is evident, with about half of travelers typically choosing the cheapest option for flights and accommodations, there’s a clear willingness to invest in experiences that enhance the overall journey. This demonstrates a desire to maximize not just monetary savings but also the experiential surplus derived from travel.

The Price-Conscious, Surplus-Seeking Traveler: The fact that a significant portion of travelers prioritize price underscores the importance of competitive pricing. However, it also presents an opportunity. By offering transparent and fair pricing, travel companies can build trust and attract price-sensitive customers, laying the foundation for a positive surplus perception.

Experiences that Justify the Premium: A large majority of travelers believe a better experience is worth paying more for. This directly translates to a higher perceived value and, consequently, a greater consumer surplus. For example, a one-of-a-kind boutique hotel that offers personalized service, unique local experiences, and a curated ambiance can command a higher price point because it delivers a richer, more memorable experience.

Bundling for Value: Consumers are drawn to bundled offers, perceiving them as a way to unlock greater value. For instance, a resort that packages accommodation with meals, spa treatments, and airport transfers creates a more compelling proposition than one that offers a low base rate but charges extra for each amenity. We’ve found this bundling strategy can increase the perceived surplus by offering a comprehensive experience at a perceived discount.

Loyalty Programs Cultivating Long-Term Surplus: Loyalty programs are powerful tools for fostering long-term customer relationships and enhancing the perception of value. Airlines that offer frequent flyer miles, upgrades, and lounge access to their loyal members essentially provide an ongoing surplus that keeps customers returning. While building true loyalty with customers requires more than points and miles, loyalty programs drive engagement and increased opportunities to build true emotional loyalty.

Transparency as a Trust Builder: Deceptive pricing practices erode trust and diminish perceived value. This issue has been well-publicized in the industry, and experience data proves they are short-sighted. A customer’s trust will take a significant hit if they are surprised with a charge of $30 a night for bottled water upon request, wifi they can get free at any coffee shop and a small fitness center they don’t have time to use. Travel companies that are upfront about their fees avoid hidden costs, and truly offer amenities of value are more likely to be seen as offering a fair deal, which contributes to a positive consumer surplus.

Navigating today’s economic landscape

A brand’s sustained success lies in recognizing and responding to the diverse needs and preferences of consumers, balancing price with positive experiences to foster loyalty and drive growth. By focusing on elements such as convenience, superior service, and unique offerings, brands can ensure they remain competitive in an evolving market. 

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