Inflation is at record highs, clocking in at 8.5% in July 2022. This has a massive impact on businesses and their profitability, and the ones who succeed will be experts at using pricing strategies to mitigate loss.
Here are 6 expert tips for adapting pricing to rising inflation, allowing your company to maximize profits.
Why Are Prices Increasing?
There are a few reasons why companies and consumers are seeing rising costs.
Of course, the current 8.5% US inflation rate is a significant factor, and this article will discuss how to manage pricing strategy amidst such high inflation. But it’s critical to understand the other dynamics at play.
Rebounding demand is having an impact on increased prices. During the pandemic, consumers experienced months of suppressed activity and are eager to make that up. Pair this with limited supply and you create the perfect price surge conditions.
Further, there may be too much cash in the market chasing constrained supply. In the US, the M2 measure of money supply saw a record increase of over 27% in the year to February 2021.
Lastly, there are the one-off events such as the Ever Given, a massive container ship, getting stuck in the Suez Canal and blocking shipping routes for six days. Geography is also at play as companies deal with difficulty transporting between regions.
Now that you better understand the dynamic factors impacting price increases, let’s discuss the best strategies for adjusting pricing amidst inflation.
Tip 1: Utilize Strategic Price Adjustments
During periods of high inflation, customers understand there will be pricing changes. This understanding allows businesses to overhaul their pricing strategies and reset where needed.
Look at all customer segments and focus on two main groups: those with low profitability and those with average profitability.
Focusing on low profitability customers makes sense. If you can bring them into the standard range, that will help your margins.
However, companies often overlook average profitability customers. This segment can be the most significant opportunity for price adjustments. Look at your data and understand who these customers are and how they buy. From there, build strategies to move them towards ideal prices.
Tip 2: Decide Faster
In stable environments, companies have a set pace for when they review pricing strategies. In times of high inflation, businesses must act fast to minimize profit loss.
Give your decision-makers the tools they need to iterate on pricing faster. Have visibility on the macroeconomic climate and insight into your own data. Make a conscious effort to track KPIs, monitor customer reactions, and respond to competitor decisions.
However, recognize that decisions will sometimes need to be made without all the data.
Pricing adjustments are ripe with unintended consequences that can pressure your organization. Expect that and use it as a reason to accelerate decision-making. Approve exceptions quickly and react to market and customer feedback.
Tip 3: Adjust Tactically, Not Broadly
Generic price increases can negatively impact customer trust and may demonstrate insensitivity. Rather than hiking prices across the board, study your customers. You can make adjustments accordingly if you know how price-sensitive a given segment is.
The most successful companies examine customers’ end-to-end profitability and how willing they are to pay relative to their peers.
An example of this approach is retailers increasing the cost of secondary and tertiary goods while staying competitive on primary items. If someone is buying higher-tiered goods, they’re likely less price sensitive; alternatively, those conserving and sticking only to the essentials aren’t priced out.
Tip 4: Carefully Plan Future Pricing Rollouts
Although customers brace for price increases during periods of high inflation, your sales teams will need to be strongly enabled. Many price increases fail due to a lack of strategy and support.
Sales teams need to understand relevant data and receive training on handling difficult conversations with customers. They need to know why the price increases are happening and how to soften the blow.
Internal and external transparency on price increases is essential to ensure they’re as well-received as possible.
Tip 5: Communicate Price Changes Clearly
No customer welcomes a price increase, even if they expect it. Here are some best practices for successfully announcing these changes.
- Contact Customers Directly
Send a price increase letter to all customers who will be affected. Address these letters to the customer to be as personalized as possible.
- Give Advanced Notice
Don’t let customers find out about price increases after the fact. If you notify them afterward, this can be taken negatively, as people didn’t have time to prepare. Give customers ample time to prepare for price increases so they can reassess their budget or look for alternatives as needed.
- Explain The Reasoning
Honesty is your friend. Justifying decisions makes them easier to accept; reassure your customers that their satisfaction is your top priority, and explain what caused the price increase.
- Higher Prices = Better Quality
One way to reassure customers amidst a price increase is to remind them that higher prices mean better quality. As goods, hires, and operating costs increase, price adjustments are necessary to deliver the quality customers expect.
Tip 6: Look Beyond Pricing to Reduce Costs
While adjusting pricing strategy amidst inflation is essential, the best companies also go beyond this to reduce costs. Consider the following ways to reduce business costs:
- Cut production costs
- Limit supply expenses
- Encourage efficient use of employee time
- Maximize employees’ skills before hiring
- Modernize marketing efforts to limit paid advertising
You can call on various teams to help reimagine products and ways to reduce costs. Especially when it comes to cutting production and supply expenses, you’ll want to ask your engineering or sourcing teams for innovative ideas on adjusting materials, packaging, or product features to save.
You can also consider strategies such as reducing SKU complexity, limiting inventory and waste, and sourcing only from preferred vendors.
Finding The Right Pricing Strategy Leader
Maximizing profits through pricing strategy is impossible without a capable and experienced pricing strategy team. Since pricing roles are relatively new, identifying the best talent can be challenging.
Save time and money by letting Jennings Executive find your senior pricing team for you. Our two decades of experience mean we’re the experts at matching companies with pricing talent. Learn more today!