How B2B And B2C Companies Can Manage Price and Inflation Index 📐
As companies and suppliers pass on increasing costs during this Covid-19 induced inflation, they need to think of creative solutions and shift the focus from a problem into an opportunity. How can B2B and B2C firms work their way through the trends of a price and inflation index or Consumer Price Index (CPI)?
The pandemic, Russia’s invasion of Ukraine, and strong consumer demand have created a perfect storm that has raised prices for everything from electricity to crops, adding to the inflationary pressures impacting the world’s major economies, including the United States, United Kingdom, Germany, and France.
Australia is no different. The Consumer Price Index (CPI) measures household inflation and comprises price change figures for many areas of household spending. The Australian Consumer Price Index CPI grew to 126.10 points in the second quarter of this year, up from 123.90 points in the first quarter.
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The consumer price index is the most commonly used metric to measure inflation. It monitors price changes for basic needs such as food and medicines. Then CPI averages the amount that people pay for over time.
However, as inflationary pressures increase, overhead costs also go up for raw materials, transportation fees, and manufacturing. This affects customers, operations, and even employees.
Inflation also decreases the purchasing power of consumers. And at times like this, businesses have to adapt by taking in some of the costs. It’s because passing all the cost increases onto the consumers may push them to competitors in the market.
Luckily, a market that has few competitors or sellers won’t be impacted as much as other B2B and B2C firms. What’s more, if it’s an oligopoly, then a market leader can even exercise price leadership. But what if you belong to a congested market?
In this article, we help you process inflation as a way to capitalise on opportunities and build your brand without upsetting customers because of price inconsistencies. At Taylor Wells Advisory, our consultation work over the years showed that aside from coming up with creative ways to charge customers more, businesses should also be asking why they should be charging at their quoted price range in the first place.
Understanding Price Inflation Index
Understanding the price inflation index is crucial for businesses to make informed decisions about pricing strategies. The price inflation index measures the average change in prices of goods and services over time. It helps businesses assess the impact of inflation on their costs and revenues.
Firstly, let’s break down what the price inflation index means. In simple terms, it’s a tool used to track how prices change over time for a basket of goods and services commonly purchased by consumers. This index is often represented as a percentage increase or decrease.
For instance, imagine a hypothetical scenario where the price inflation index for a particular quarter is 3%. This means that, on average, the prices of goods and services have increased by 3% compared to the previous quarter.
Understanding this index is essential for businesses as it provides insights into the overall inflationary trends in the economy. When the price inflation index rises, it indicates that prices are increasing, which can impact businesses in various ways.
For example, if a business relies on raw materials that are prone to price fluctuations, such as oil or metals, a higher price inflation index could lead to increased production costs. As a result, the business may need to adjust its pricing strategies to maintain profitability.
Moreover, the price inflation index can also influence consumer behaviour. When prices rise steadily over time, consumers may become more price-sensitive and seek out cheaper alternatives. This can affect demand for certain products and services, requiring businesses to adapt their marketing and pricing strategies accordingly.
Understanding the price inflation index is essential for businesses to navigate changing economic conditions and make informed decisions about pricing strategies. By monitoring this index closely, businesses can anticipate inflationary pressures and adjust their pricing strategies proactively to remain competitive in the market.
Impact of Price Inflation on Businesses
The impact of price inflation on businesses is significant and requires careful consideration in strategic planning. When the price inflation index rises, it affects various aspects of business operations.
Firstly, let’s understand how price inflation affects businesses. When prices increase, businesses often face higher operating costs. This includes increased costs for raw materials, labour, and transportation.
For example, imagine a manufacturing company that produces consumer electronics. If the price of copper, a key component in their products, rises due to inflation, the company’s production costs will increase. This can squeeze profit margins unless prices are adjusted accordingly.
Moreover, price inflation can also impact consumer purchasing power. When prices rise faster than wages, consumers may have less disposable income to spend on goods and services. This can lead to reduced demand for certain products, affecting sales and revenue for businesses.
For instance, consider a retail business selling luxury goods. If the price inflation index indicates a significant increase in overall prices, consumers may cut back on discretionary spending, impacting the sales of luxury items.
Furthermore, price inflation can create uncertainty in the business environment. Fluctuating prices make it challenging for businesses to forecast future costs and revenues accurately. This uncertainty can hinder long-term planning and investment decisions.
The impact of price inflation on businesses is multifaceted. It increases operating costs, affects consumer purchasing power, and creates uncertainty in the business environment. By closely monitoring the price inflation index and implementing strategic pricing and cost management strategies, businesses can mitigate the adverse effects of inflation and maintain profitability in a changing economic landscape.
Shrinkflation: Inflation in Prices
Decreasing the size is a subtler way to raise prices. This is also known as shrinkflation. We see this in cereal boxes, beverages, chocolate bars, toilet paper, and soap brands that use this strategy to keep earning the same level of margins to deal with inflation. Interestingly, people will notice price increases more than the reality of shrinking sizes.
Soap, for instance, requires chicken and beef fat. And over the course of the pandemic, as meat prices went up, soap brands reduced their packaged products while maintaining the same price.
Interestingly, some brands hesitate to put back regular packaging sizes even after inflation has eased. Why? Because it costs them more to shift back to the original packaging size. Some customers notice these changes and become upset. Others, mostly aren’t even aware of these seemingly subtle changes.
Price and Inflation Index: How to Adjust Prices for Inflation
The inflation ever since the COVID-19-induced pandemic over the last few years is quite different compared to previous inflationary pressures like the 2008-2009 economic recession and stagflation back in the 1970s. Why?
More business leaders nowadays have had the advantage of innovative technology and digital capability. Those who invested in these platforms almost didn’t miss a beat as Covid-19 lockdowns took over.
Businesses were able to transform their services into delivery options, adapting to the need for virtual reality. This allowed customers to seamlessly order through websites, apps, and social media – anywhere, anytime. And it’s all thanks to the internet.
Previous recessions didn’t have this type of modern technology to provide them more market visibility, data analytics, and customised options to target specific customers.
Some businesses look at inflation as a means to pass down increased costs to customers. And it’s understandably dreadful. But businesses that are creative enough to shift their perspective from problem to opportunity can cope better than their competitors.
As such, businesses often mistakenly resort to 3 reactive solutions to adapt to inflation in prices:
Pass the costs on to customers by increasing the price
Slashing margins for investors
Slashing costs
Bundling vs. Unbundling – Inflation in Prices
The research and development team needs to take over. They should consult with sales, marketing, and pricing teams. In this way, bundling or unbundling existing products/services can be adjusted to lower prices. This, in turn, creates more opportunities to build value, brand reputation, customer loyalty and trust.
Depending on what market trends, customer behaviour, and buyer patterns are, a company can influence its customers’ buying decisions. To be able to make these changes, you also need to ensure that production and manufacturing capabilities are optimised.
Pricing teams also implement a good-better-best price hierarchy. This exposes customers to lower prices, upgraded services, and premium versions to drive more revenue.
At the same time, you have to be careful that you don’t pile up all the value you can offer in a bundled service. Because you would be underselling your product/service. Moreover, you don’t have to apply discounts on your product portfolio. The basic version, upgraded, and premium price do the work for you.
As there are price-conscious customers, there are also those who are conscious about quality and quantity.
Those who are more quality-conscious don’t tend to accept a downgraded version of the products/services that they’re used to. In this case, extra features from the upgraded or premium version can either be adjusted or repositioned elsewhere. This can create new revenue opportunities without stressing over cost increases.
A research recently showed that price-sensitive shoppers pay more attention to price than quantity. More companies implemented this strategy during past inflation scenarios.
Rebranding – Inflation in Prices
There are many reasons that a company rebrands itself – when it struggles to differentiate itself from competitors in the market, merging and acquisitions, redefining values in line with current trends and behaviour, or an expansion that leads to a new target market.
- When Adobe transitioned from discs in the 1990s-2000s to cloud storage, it faced some decline in customers and revenue for a short while. But it didn’t last long as it rose from $22.5bn to $310bn over the recent years after the transformation.
- London-based Aviva, a car insurance company, changed the game when it based its pricing on customer driving behaviour. With tracking devices and drivers’ consent, they were able to justify their premium price points for those who were “risky drivers.”
In fact, Tesla is also experimenting with this model for its car insurance sector. This motivates car owners to be more conscious about their consumption and driving behaviour while minimising car accidents.
Pricing Structure in a Price and Inflation Index
Your product portfolio should be priced according to the value it offers. However, some brands can’t seem to find the balance between overcharging customers and underselling themselves.
This is where working with pricing teams and professionals comes in handy. Because most businesses only realise they need a pricing capability when it’s too late, a.k.a. margins and revenue loss. Before that, they mainly rely on sales teams, discounts, and price guesstimates.
If you’re a business that heavily depends on price slashing as a competitive advantage, customers often question the quality of products/services that you offer. Not only does it affect your overall image. But it upsets customers every time you have to raise prices back up to regular rates. Even if it’s out of necessity like inflation or other crises like the Covid-19 pandemic.
Now, this could be the right time and opportunity to improve your reputation. It could guide you to better decisions leading you to minimise customer backlash.
In many cases, customers will request a refund or credit once they notice a price increase. Especially if you haven’t communicated the changes properly, then there’s less flexibility to mitigate negative responses.
Offer a lower price point: Price and Inflation Index
Subscription models like monthly-based or per-consumption levels change the shift from price increase to price transparency. This helps customers manage their options and budgets according to their needs.
At the same time, it will pinpoint who your loyal customers are and weed out those whom you can create more opportunities for. This is common in streaming services, car insurance, the energy market, software, and even online courses where people are charged by the hour.
Raise the price: How to adjust prices for inflation
The other option is to increase the price while being careful about overpricing. You should also check if your expenses are invested in the right areas and departments.
For instance, you can eliminate excessive spending on marketing campaigns especially if this isn’t necessarily the platform that people respond to the most. It doesn’t mean that you must completely remove all marketing efforts as it remains an important component of your organisational function.
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Bottom Line
Sophisticated technology and innovations somehow help ease the challenges that come with inflation nowadays. So, you must identify what’s your competitive edge. You can’t rely on discounts and promotions all the time as a way to set yourself apart from the market. It’s not a competitive edge. Rather it’s going to drown your business into debt by underselling your value, posing more risks to your sustainability.
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Are you a business in need of help to align your pricing strategy, people, and operations to deliver an immediate impact on profit?
If so, please call (+61) 2 9000 1115.
You can also email us at team@taylorwells.com.au if you have any further questions.
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