The news: “Innovation” has become a recurring theme for consumer packaged goods (CPG) companies as shoppers pull back on everyday purchases and switch to cheaper brands.

• Innovation came up 38 times during Procter & Gamble’s most recent earnings call, as management outlined the steps being taken to enhance the value perception of the company’s products and attract spending from inflation-stretched consumers.
• Kimberly-Clark and Clorox executives each used the term 29 times, while Colgate-Palmolive mentioned it 27 times and Unilever a mere 19 times—although it highlighted innovation’s contribution to its best performance since 2010.

Zoom out: It’s no surprise that CPG companies are focusing on innovation as a solution to their loss of pricing power and market share.

It can be an effective differentiator. Kimberly-Clark CEO Mike Hsu said that the company’s strategy involves communicating to customers how its products “uniquely [solve] their problems in a different, better way.” Its recent discovery of an alternative to wood fiber that is stronger, softer, and less environmentally damaging—as well as cheaper to use—fits that mold, giving Kimberly-Clark an avenue to show that its products are better and more ecofriendly than competing brands.

It can justify higher prices. Companies are betting shoppers will pay more for products that are considered higher-quality or have tangible benefits—such as improved whitening capabilities or increased absorbency—that make the extra cost worthwhile. That tactic could be more effective on younger consumers: Gen Zers and millennials are more likely than older generations to cite better quality as a reason for purchasing a new brand or product, according to our US Consumer Path to Purchase survey.

It can drive category growth. P&G noted that improving the performance of existing products such as Tide liquid detergent can grow the overall detergent market while bolstering its own share. However, doing so requires a “higher bar on innovation,” as well as a stronger overall value proposition, CEO Shailesh Jejurikar said.

Implications for retail: Leaning on innovation to drive growth may work for some brands, like Colgate toothpaste or Tide detergent, where consumers have strong loyalty and are reluctant to switch to products considered inferior. But product enhancements alone won’t restore companies’ value perceptions, especially if they are used to push through price increases, which could exacerbate K-shaped trends in consumer spending.

Rather than tying innovation to premiumization, CPG companies should look for ways to offer more value to consumers at every price point. That could mean spending more on marketing to make sure shoppers understand the advantages a brand-name product holds over private label alternatives or adjusting pack sizes to better meet consumers’ needs.