How to Get your Game Ahead of a 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 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.
But 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.
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, there are brands that 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 are able to 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
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 capability 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 that 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.
And ResearchGate recently shows 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. Though some brands can’t seem to find the balance between overcharging customers and underselling themselves.
This is where working with pricing teams and professionals come in handy. Because most businesses only realise they need a pricing capability when it’s too late, a.k.a. margins and revenue loss. Prior to 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 budget according to their needs.
At the same time, it will pinpoint who your loyal customers are and weed out those that you can create more opportunities for. This is common in streaming services, car insurance, 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.
Bottomline: Inflation in Prices
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.
For a comprehensive view on integrating a high-performing pricing team in your company,
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 email@example.com if you have any further questions.
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