Navigating High Inflation: Pricing Strategies for Success

In tough times, it can be difficult to innovate and strategize. With rising interest rates and inflation, margins can suffer, and options become limited. But during these times, it's crucial to understand where you have leverage to respond. And that's where a pragmatic approach can create opportunities to reorient from reaction mode to once again driving your company's path to the future. In a two-part series, we'll examine practical ways that thoughtful leaders are navigating economic challenges to position their companies for success.

Part one focuses on pricing strategy. During high inflation, the complexities of customer response to pricing strategies become even more apparent, as many unfortunately are experiencing. We're going to cast a strategic and hopefully innovative lens on that pain point because customers' pushback can provide a powerful pivot point to redefining your customer relationships and staying competitive. Part two will explore how companies have used downturns to invest in innovation and resilience, improving margins regardless of economic winds.

Rising inflationary costs affect industries differently, of course. For instance, pricing strategy impacts how manufacturers add critical value to the economy by balancing their pursuit of sales and share, while wholesalers must understand customer purchasing behavior to optimize the incentives they offer in what typically is a commodity service. The price-sensitive competitive environment is especially pronounced in e-commerce, where brands must gain control not only of vendor pricing to prevent a contracting profit floor but also gain a handle on consumer price sensitivity to understand where the profit ceiling truly is. In such an environment, retailers must understand their best customers, 20% of whom contribute to 80% of sales - and more than half of which are one-time buyers in a world where customer lifetime value can be a critical metric.

C-level officers, pricing managers, and e-commerce category leaders face distinct yet interconnected challenges with pricing. For C-level officers, it's about identifying and eliminating profit margin drags, creating a single source of truth for contract pricing, and managing price lists with ease. Pricing managers grapple with intuition-driven pricing strategies and the need to consider various market factors. E-commerce leaders have to contend with the race to the bottom, consistency across platforms, and a lack of personalization.

Regardless of the position, one thing is clear: Improving your pricing strategy begins and ends with better insights into customer behavior.

A clear sense of price positioning and an improved pricing plan can help businesses stay ahead. At its best, this provides personalized experiences giving businesses more control of revenue and profit, and give customers a higher sense of value. Analyzing consumer purchasing decisions can provide a better understanding of buyers' needs and behaviors, leading to increased customer loyalty. By taking advantage of these strategies, businesses can achieve greater profitability and a competitive edge even during times of economic uncertainty.

The consumer is the key source of insights here. According to European price consulting firm Symson, 90% of consumers spend time hunting online for deals, and 86% compare sellers' prices. Pricing is the first criteria in 60% of buying decisions, but only 26% of businesses consider the competition and the market when setting prices.

But setting the optimal price isn't the only play in the playbook -- understanding the right price range is likely to offer the first vital insight for agile business leaders. Keeping an eye on the competition is important here, as their pricing strategies will tell you what consumers think is the low price and high price for a comparable product.

Look within, too. Sometimes it may seem like the easy solution is to simply raise prices across the board, but hold on just a moment. Have you looked at your own product lines? Examined your key customers' price elasticity? These insights can be key in discovering areas where you can bundle loss-leaders with value-added products or raise prices faster among products with the most unique benefits to customers. And let's not forget the product level – creating "value" versions that reduce costs to serve customers while still providing essential features that match customers' willingness to pay.

Why does even a little bit of customer understanding go a long way?

The most common pricing strategy businesses implement is the cost-plus pricing model, which is the one most vulnerable to inflation and climbing interest rates. This model calculates the cost of a product and adds a profit margin to determine its price. It's useful for many companies to let the price of the product increase in line with its cost. However, relying solely on this model may make your product less attractive to consumers in comparison to your competition. Think of a grocery item in a consumer's basket like organic milk or coffee, one where you would economize as a consumer on a budget.

In industries with few competitors, a reasonable pricing strategy is a competitive pricing model, in which you base your prices on the competition. During high inflation rates, it is useful to keep this information in mind so that you can continue to distinguish yourself from the competition while staying within your company objectives. Think of international airlines or other industries where supplier power dominates.

Dynamic pricing strategies can also be an effective pricing model during times of high inflation rates, especially for companies with many offerings. This is the true airline pricing model, where carriers offer a different price for each seat, or at Amazon, where prices also based on the customer, supply and demand, and numerous other factors, including buyer persona (for airlines) or browser type (for Amazon). By automating the pricing process with software and algorithms, the model adjusts prices to changes in various factors, such as an increase in costs or the prices of competitors.

No matter which strategy you employ, implementation always returns to conversation with the customer and will be essential in a B2B environment where relationships dominate the sales cycle.

When implementing a new price during high inflation rates, it is crucial to communicate the price increase to your customers. This is especially important for B2B companies where personal contact with customers is necessary. The precise communication strategy depends on the type of service provided, with single increases likely preferrable in a B2B environment, and well-calibrated incremental increases in a B2C company that coincide with notable product improvements and competitor pricing increases.

Growth Innovation Strategy Group helps businesses maximize their pricing power. Our pricing strategy services focus on an improved understanding of customer demand and price sensitivity and enhance pricing discipline and competitive position. To achieve these benefits, we follow a process that evaluates price elasticity, competitive pricing, external factors that could impact pricing, and optimal product bundling.

Pricing strategies during high inflation rates require careful consideration, but with the right approach, businesses can maintain profitability and remain competitive. And even a little understanding is better than none. By analyzing industry-specific considerations and implementing the right pricing model, businesses can improve their margins and buy time to invest in future capacity building, the subject of the next post in this series.

Read Part 2 here: Strategy and Innovation Resilience: Turning Adversity into Opportunity.

Are you struggling with understanding your customers and setting your pricing strategy? Reach out for a free, short consultation.