The Art of Pricing During Inflation

The US inflation rate has been relatively low for decades, lingering around 2%. But recently, the inflation rate has dramatically increased to nearly 7%. The Bureau of Labor Statistics, however, uses a different methodology to measure the inflation rate from 1980 and puts the figure at over 13%.

Inflation is a significant concern for all parties, from companies, individuals, and politicians to retailers. Prices are increasing for just about every item forcing millions of consumers to make increasingly hard choices. According to a report from The NPD Group, over 8 in 10 customers plan to rethink or even minimize how much they spend on products in the next three to six months.

To deal with the effects of inflation effectively as an online retailer, you’ll have to consider adjusting prices to match the inflation rate.

The Impact of Inflation on Businesses

While the effects of the pandemic may be subsiding, inflation has taken off. The global economy is facing inflation resulting in a drastic price increase of products and services over time. The Consumer Price Index increased 7.5% through early 2022, a higher rate than at any other time in the 40 years before. From consumers' perspective, the effects of inflation might include higher costs of items. But small to medium-sized businesses might be the ones experiencing heavy consequences.

71% of small-sized businesses cite at least a 20% or higher increase in the costs of products or services. The rapidly increasing costs are passed on to consumers. They, therefore, have to make the right strategic business decisions. Simply increasing prices across the board is a decision that, used inefficiently, can destroy customer relationships, reduce sales, and hurt profit margins. Thus, retailers are in a hard place because re-pricing during inflation is also essential to sustain margins in a new environment of rising costs.

Moreover, 32% of small-sized businesses reported the fear of supply chain shortages hurting the health of their operations.

However, on a more positive note, this is an opportunity to design a new relationship with consumers by helping them solve their own issues and rising prices. The most effective pricing strategy in times of inflation should consider this an opportunity. It is a strategy to increase your prices and correct poorly priced items. The right pricing strategy in an inflationary environment will allow the market to help you. Although consumers are often less-price sensitive regarding exclusive, specialized products, set the price increase accordingly to avoid getting customers angry.

Practical Ways to Manage Inflation

Before completely changing your pricing strategies, you can consider other practical ways to help you adjust and adapt to sales-led pricing during inflationary periods while maintaining long-term value for your customers and business.

Market Research

Monitoring the market is a great strategy that helps you see the pricing techniques of competitors. It also allows you to respond fast to beat the tight market competition in Ecommerce. According to a recent study, ecommerce business will account for 20.4% of retail sales worldwide by the end of 2022, an increase from 10% five years ago.

Doing market research equips you with competitive analytics to help you save margins during inflation. With solutions like advanced analytical pricing, you can monitor the latest demand trends, competitor prices, price elasticity, etc.

Today, ecommerce consumers are willing and ready to look for other options when faced with high prices. So it's incredibly crucial to know other market prices. Track other competing brands’ prices and understand where to position in the market.

Communicate increase in prices

Buyers are often willing to accept and adjust to price increases when they get the information with good reasons. Studies prove that the significance of communication creates a solid buyer-seller relationship.

So intelligently send a message about the price increase. Here are a few tips to help you communicate price increase:

·        Be clear and transparent about the information. This helps you build solid trust.

·        Inform customers before raising prices. Notify buyers directly through SMS since they can see these right away.

·        Provide new features or content that are exciting or was existing but hadn’t been introduced to buyers

·        Focus on offering value with excellent product quality

·        Avoid offering apologies. Explain the circumstances politely and in an appreciated manner.

Analyze Key Value Items (KVI)

Key Value Items (KVI) are items that are frequently purchased. These are high-selling items with high price elasticity and get sold often since buyers highly value them. So identify your shoppers’ KVI, then reduce their prices. You can use AI technology and algorithms to identify KVI for your customers.

Re-price these KVI competitively. When you reduce these items' prices, you will likely experience extra sales. Once you have more buyers, you can raise the price of another product, and consumers will be willing to buy because they got their KVI at the lowest price. This makes it possible to have a better margin on the product.

The perks of identifying KVI include the following:

·        More profit overall.   

·        Improved customer perception of your product and services compared to competitors.

·        Higher sales and margins are key value items.

Focusing on Key Value Items is an effective and practical pricing strategy. It is a win-win situation for both sellers and buyers, especially in an inflationary environment.

Build a strong brand image

Depending on market conditions, you’ll have to increase prices at some point. However, this shouldn’t make you have poor margins; you can also get better sales and profits. A positive brand image can limit the adverse effects of inflation and increased prices.

With a positive brand image, consumers will be willing to spend more for your branded items. From a customer’s perspective, maintaining a strong brand image is more important than most businesses imagine.

To build a strong brand image, you must first identify your business goals defining the brand identity. The values and beliefs you stand for and emphasize define your brand identity.

Companies often have less control over how consumers perceive the brand, but here are some actions that can help you have a positive image.

Understand customers perceived value. This includes pricing, convenience, and reputation. Collect data, observe and conduct surveys or trials to define their perception of value. Consumers often seek service or product that meets their needs and expectations.

Provide multichannel customer service. Exceptional customer support is critical to buyers. You need to respond to their needs fast and effectively, for example, through live chats for 24/7 customer support. This creates a positive perception of your brand. For instance, Walmart builds a strong brand image by selling items for lower prices than other retail brands.

Plan other options to lower costs

Before raising prices due to inflation, companies can also try to reduce costs with other options. Top businesses often encourage their teams to reimagine items most impacted by inflation. This is to adjust the design, including packaging, features, and materials, in response to high production and servicing costs while keeping the high-quality functionality that customers need.

Small businesses that can’t quickly redesign their products usually utilize category management to lower costs by reducing complexity, adjusting assortment, lowering inventory, and sourcing from selected vendors. Reducing costs can help you achieve a similar margin as before.

Commercial positioning

In some cases, you can adjust your pricing model with strategic commercial positioning without necessarily raising prices. Shrinkflation is a great commercial initiative that maintains the same price for a service or item but lowers the amount buyers receive for the specific price. In addition, you can also offer fewer or no deals or discounts where the cost is included in the pricing strategy.

Build the art of price change

Consumers react differently to increases in prices depending on how price sensitive they feel and the effects of inflation on the cost of the products or services they purchase. Rather than making substantial price increases that may damage customer trust and show your brand's insensitivity, your business can thoughtfully tailor the inflationary price increases for each product segment and customer.

Best Inflation Pricing Strategies

There are several pricing strategies you can leverage to raise your prices. These can be used individually or in combination for more practical results.

·        Cost-plus pricing

This is one of the most straightforward pricing models. You simply calculate the product cost and add a percentage or profit margin to find the new price for your product. In inflationary periods, it's useful to increase the price of the product in line with the product production cost. While this model is convenient and easy to implement, it can make your brand and products less attractive to buyers than competitors.

·        Competitive Pricing

This pricing strategy allows you to set your prices based on competition. With this model, you always try to be cheaper or offer the average price possible. During inflation times, when competitors are making price changes as well, it's quite useful to monitor their prices. This helps you distinguish your brand from competitors in line with the business objectives. For example, if you deal with ecommerce automation software, and your competition sets prices ranging from $9.90 to $29.90 per month, you can choose a price between the two. This pricing model is one way to stay above the competition and keep a dynamic pricing strategy.

·        Key-value item pricing

When you use this pricing strategy, you try to get buyers to your store with reduced prices for key-value items. You then add prices for products that customers purchase in addition to the KVI. In an inflationary environment, it's helpful to categorize your products into profit margin items and KVIs. That way, you can easily entice buyers with discounted prices for their favorite items while at the same time making higher profits on the additional products by setting higher margins than inflation.

·        Dynamic pricing

Also known as demand pricing, surge pricing, or time-based pricing, dynamic pricing is a flexible model where prices automatically fluctuate depending on the changes in customer and market demand, competition, etc. For example, a dynamic pricing strategy can include weather conditions and competitor prices for increased costs. These algorithms allow businesses to change prices to match what and when the consumer is willing to pay and when exactly they are ready to buy a product.

Looking Ahead

As brands and consumers continue to navigate the pressures linked to inflation, it's now crucial to work on developing the art and science of price changes. While inflation is a challenge, and it's difficult to address such abrupt, ever-changing shifts in pricing during inflation, it's not new. Companies have opportunities to turn their lens inward and correct pricing mistakes and maintain margins while also establishing, rebuilding, and maintaining values that resonate with consumers now and in the long term.

Enterprises should use inflationary periods to build internal processes and infrastructure to make disciplined pricing a driver for profit and future growth. Those that manage effective pricing models during inflation will improve their margins, revenues, and customer loyalty and will be able to respond more effectively to future surprises, inflationary or not. Thanks to automation and AI, you can stay on top of the competition and maximize sales in an inflationary environment.