The world is hit by crisis after crisis, and both governments and economies are trying to find adequate answers to current geopolitical events. Although inflation is one of the most used words recently, the answer to the question of how to oppose it still eludes everyone.
How does inflation affect businesses? What pricing strategies should be applied in this period?
These are just some of the questions we will address in this post.
The world economy has been under constant pressure since the beginning of 2020. Just when the beginning of recovery began to appear, the world found itself in a new geopolitical problem — the Russian invasion of Ukraine. Apart from the human casualties, this, like any other conflict, gave rise to numerous economic problems. The blocked flows of fuel and agricultural imports resulted in rising energy and food prices. As a result, inflation ran wild around the world.
In the US, inflation caused an increase in prices by 8.6% in May, which is a 40-year high. In the same month, inflation spiked in Europe as well. As expected, the countries that relied the most on Russian gas and raw materials from Ukraine also faced problems. Thus, inflation in Germany, France, Italy, and Spain reached the level of 8.1%.
The UK fared no better, where inflation exceeded even the US record and amounted to 9.1%.
Interestingly even Israel, which managed to maintain stable inflation during the Covid period, experienced a market disruption, and their inflation rate increased by 4%.
How does inflation affect businesses?
Whenever there are market disruptions, the consequences are felt by everyone — from companies to individuals. Companies’ costs are rising due to the rise in energy prices, and additional problems arise in the supply chain. On the other hand, consumers feel an impact on the household budget, as the prices get higher.
The inflation rate growth means only one thing for businesses — price correction. When there is no other option but to increase the product prices, you need to take the time to consider which approach would be best.
How much will the prices increase? The prices of which products will increase first? When is the right time to increase the prices? These are all questions that you must tackle in advance.
In times of high inflation, it is more important than ever to be aware of all market changes.
Keeping track of your competitor’s actions is crucial. You can decide to take the follower position and thus coordinate your activities with the activities of the competition, but in any case, you must be ready for a quick reaction.
In addition to paying attention to competitors, it is very important to keep a clear picture of your goals. You know best what your desired goals (but also possibilities) are, so any change in pricing strategy should be well thought out.
It all sounds nice, but how do you put it into practice?
4 practical tips to manage inflation
Consumers are very sensitive to price changes, especially when they are caused by something they do not have much influence on, such as world political events. Thus, businesses are usually hesitant when it comes to price changes.
Let’s share a couple of practical tips that you can put into practice.
- Monitor the market
As we mentioned, it’s crucial to keep an eye on the competitor’s actions. Unless you have a monopoly, competitor actions will most likely affect your business. It’s wise to react timely — whether to act as a follower or to make the first move.
- Price elasticity
The main trouble with price increases is that they may negatively impact sales. While it’s relatively easy for some products to increase the price, for others the same action can be harmful. How the price increase will affect sales mostly depends on the price elasticity.
If customers perceive that there are other alternatives on the market, the price increase will only result in lower sales. If however, your product is perceived as necessary, or irreplaceable, higher prices can not jeopardize the sales. Therefore, before making any price changes make sure to know how your product will react.
- Define product roles
Different companies have different pricing strategies. Some decide to apply the same pricing strategy to all products, while others decide to define different product roles. That means that there will be product categories with different pricing strategies.
So, how can you make this division?
Before you proceed with price changes everywhere, it would be useful defining what role a product plays in your assortment. Is a product a key-value item?
Not all pricing strategies apply to every product role, so it will be beneficial to understand your products and what you want to achieve with them.
Price changes need to be communicated effectively
A price increase is never pleasant information for customers, but if a price increase is already imminent, then it’s important to communicate it properly.
It is important to announce the price increase in advance. Not only does this give buyers time to prepare their budgets but also gives you time to adjust your strategy. Based on consumer reaction to the price increase, think about what would be the smartest move. Maybe offer them a longer repayment period?
What pricing strategies are helpful during the inflation period?
If you have been following our blog carefully, you must have noticed that we have presented you with numerous pricing strategies. Although each of these strategies can be useful, not all of them will suit your business, nor will they be applicable in every situation.
Let’s take a look at what strategies can be used in a period of inflation.
- Cost-plus pricing strategy
This pricing strategy is maybe one of the most used ones during the period of high inflation. It’s relatively easy to implement, and many companies find it intuitive to increase the product price alongside the cost of the product.
However, the danger with a cost-plus pricing strategy is that your product can make you less attractive to customers. Although your price increase may be justified, customers will not care much if your competitors offer them a lower price. Therefore, pay attention to what’s going on in the market.
- Dynamic pricing strategy
The period of inflation is itself dynamic, so it’s not surprising that the dynamic pricing strategy is one of the most useful strategies that you can use in this period. This pricing model will allow you to be automatically informed about changes in the market and what is even more important, to react immediately.
Changing prices manually can be an impossible task, so many companies resort to using price monitoring tools. With the help of these tools, it is possible to make changes automatically, but also to determine the frequency of price changes that suits you best.
- Key-value pricing strategy
As we have already explained, not all products have the same role. The simplest division would be that we have key-value items and profit margin items. In the period of inflation, when the first thought of every business is to raise prices, it is very important to assess which products fall into these two categories.
It would be wise to keep your key products (key-value items) at a low price so as not to lose customers, while you can apply a higher price to profit margin items. In this way, you will achieve the desired earnings without endangering the position of existing customers.
In challenging times, such as inflation, it’s always advisable to optimize pricing strategies. Quick responses to market changes will ensure that your business is always one step ahead of the competition.
Carefully consider the options and start making changes.
How does your business deal with these economic challenges? Is there any advice you would like to share?
We’d love to hear something new, so feel free to write to us in the comments!