Adapting Pricing Strategies to Inflation
How do businesses maintain their bottom-lines during economic turbulence? Here are a few pricing strategies, from experts
Inflation is a persistent challenge for businesses worldwide – it lands not only a crushing blow to profits, but also erodes customer trust. As such, it is crucial for businesses to adapt their pricing strategies to address inflation effectively. In a recent report, consulting giant McKinsey & Co. outlines some effective approaches that businesses can use to adapt their pricing strategies in the face of inflation.
- Implementing dynamic pricing: Dynamic pricing involves adjusting prices based on changes in demand and supply. By using dynamic pricing, businesses can ensure that their prices remain competitive while maintaining profitability. This approach enables businesses to adjust prices in real-time, allowing them to respond quickly to changes in the market. Dynamic pricing also allows businesses to capture additional revenue from customers who are willing to pay more for a product or service.
- Adopting a price escalation strategy: A price escalation strategy involves gradually increasing prices over time. This approach is particularly useful in a high-inflation environment, where businesses can increase their prices incrementally without causing a sudden shock to their customers. Price escalation can also be used to capture the value of the product or service better, ensuring that the business remains profitable.
- Bundling: Bundling involves combining multiple products or services and offering them at a discounted price. This approach enables businesses to maintain profitability while still offering value to customers. Bundling can be an effective strategy for businesses facing inflation, as it allows them to offset the cost of inflation by increasing the value of their offering. Customers are often willing to pay a premium for a bundled offering, as it provides convenience and additional value.
- Focusing on premium products: Another approach to adapting pricing strategies in the face of inflation is to focus on premium products or services. This approach involves offering a high-end version of a product or service, which can command a higher price. Premium products or services often have higher margins, allowing businesses to maintain profitability in the face of inflation. This approach can also help businesses to differentiate themselves from their competitors and build a loyal customer base.
- Employing cost-based pricing: Cost-based pricing involves setting prices based on the cost of production, including overhead costs and markup. This approach ensures that businesses maintain profitability while still offering products or services at a reasonable price. Cost-based pricing can be an effective strategy for businesses facing inflation, as it enables them to maintain profitability without passing on the full cost of inflation to customers. However, it is crucial to ensure that prices remain competitive and reflect the value of the product or service.
Change management key to durability
To implement sales-led pricing effectively, an organization needs to undergo significant change management, which requires leadership to provide role modelling, conviction building, reinforcement mechanisms, and skill building. Role modelling entails leaders setting an example for their subordinates to follow by embracing the changes and behaving differently. To achieve this, organizations should announce pricing and inflation response as the top priority for the year, deprioritize conflicting initiatives, consistently communicate the importance of the effort, and take role modelling beyond one-way communication.
Conviction building involves providing clear pricing guidance for each customer and product category, overcommunicating the reasons behind the changes, and demonstrating how competitors and peers face similar challenges. Reinforcement mechanisms entail aligning commercial team incentives with the new recommendations, establishing new processes to communicate pricing recommendations, and upgrading existing systems.
Skill building involves investing in the sales organization’s capabilities, creating customer-facing sales and promotional materials, and providing training to sales representatives while arming them with facts, talking points, and FAQs. To illustrate, a global industrial company responded to higher supplier and operational costs, labour and freight rate increases, and supply-chain disruptions by raising prices. However, the sales force was not equipped to help customers substitute less expensive products or drive operational efficiencies to offset the higher costs.
The company’s leadership set up a central team to manage the sales team and train them to confidently articulate the reasons for the price increases, engage in discussions with customers, and partner with them to help offset the cost pressure. As a result, most customers have accepted the price increase, and the value-added services have strengthened the partnership between the sales team and the company’s customers, leading to an increase in sales volume.
Whilst inflation continues to be a persistent challenge for businesses, it is crucial for them to adapt their pricing strategies to remain competitive while maintaining profitability. The five approaches discussed are all effective strategies that businesses can use to address inflation. However, it is essential to consider the unique needs of each business and market before deciding on a pricing strategy. By adapting pricing strategies to inflation, businesses can remain profitable, maintain customer trust, and stay competitive in the face of changing market conditions.
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