Is Inflationary Innovation on the Way?

Paper products and oil-based consumer goods are poised to rise in cost, but don't expect shoppers to just fork over the extra dollars

by Michael Schrage

Posted on Harvard Business Review: April 28, 2011 10:50 AM

The numbers don't lie: Inflation is coming back. Let economists debate the monetary nuances of QE2 and argue whether the (American) government's core inflation measures make sense but households worldwide know that prices are going up.

Oil-based products and food most clearly cost more. Procter & Gamble and Kimberly-Clark say disposable diaper prices will jump by 7%. Toilet paper will be more expensive, too. The cost of throwing out all this more expensive stuff is rising, too. Clorox will lift prices of its Glad trash bags by almost 10% in May. Accelerating commodity inflation is as big a concern in Europe and China as in North America.

Consumer packaged goods companies and supermarkets will come up with clever reformulations and redesigns as their costs of inputs rise. Their procurement people will hunt for alternate supplies and novel substitutes. But today's consumers — assiduously trained by Wal-Mart, Kroger's, and the entire digital media industry — to pay less for more will not be happy, loyal or satisfied being told to pay more for less. Rising inflation threatens to disrupt or destroy carefully cultivated brand value propositions.

Consumers aren't stupid. They're prepared to pay more if they get—or perceive to get—more. Organizations believing that their best customers have little choice but to accept price increase passalongs in this environment are setting themselves up for failure. After the first flurry of reformulations and sticker shock, customers will quickly flock to vendors who offer more value for more money.

Yes, they want the 'best' prices but, if everybody's prices are leaping up, they're going to take a step back and recalculate their personal value-for-money purchasing equations. Maybe it's a QR code that gets them a two-for-one promotion the next time they're in-store; maybe it's a free Android app that makes the product easier to use or more valuable in a substantive way (i.e., upload the photo of a wine stain on your table cloth to a website and get back in minutes a detailed—and guaranteed—expert treatment for its safe removal); perhaps it's an invitation to participate in an 'open innovation' focus group for non-trivial compensation.

The details of the added value are far less important than its presence: inflationary pressures create innovationary pressures. Many industries became quite skilled in process innovations as their media for assuring economic efficiencies. Global enterprises have become astonishingly good at cost-cutting. But with inflation defined by monetary policies and commodity shortages, those process efficiencies preserve competitive advantage more than creating it. Questions about using the cloud to wrap old data, new information, and innovative services around product offerings to add value become more urgent. When prices rise for everyone, diligent consumers recognize that shopping for the lowest prize makes less sense than looking for the highest value. It's this inflation-driven shift from lowest price to higher value that becomes the innovation invitation for enterprises world-wide. Yes, you still have to compete on price. But when inflation puts everyone at an increasing disadvantage, being innovative about being innovative isn't just the most logical organic growth investment, it's arguably the only real choice.

How is accelerating inflation altering your innovation investment strategy? What do you expect from market leaders who are now raising their prices and asking you to give more for less?

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