Dealing with the rising inflation: Why businesses should revise their pricing strategy
You come home after your weekly shopping and look at your bill scratching your head, baffled by the prices you see. The question “when will prices fall?” is on everyone’s mind as consumers and businesses dread the next slump.
At the end of June, inflation in the US hit 9.1%, a four-decade high. The latest release of consumer price index data, published on Wednesday, 13th July, showed that prices had spiked by 9.1% year-on-year, the most significant increase since 1981. From May to June, prices went up by 1.3%. The increase was led by gas and food prices, rising 11.2% and 1%, respectively, on a monthly basis. Core inflation—excluding categories like food and energy—rose by 0.7%.
What is causing inflation?
Inflation is a common response to economic factors caused by demand-pull and cost-push conditions. Both are responsible for a general rise in an economy, but each works differently to put pressure on prices. Demand-pull conditions occur when consumer demand pulls prices up, while cost-push happens when supply costs force prices higher.
At this point, we can specify five critical drivers of current inflation:
- supply chain bottlenecks
- post-pandemic recovery aids
- a shift in demand from services to goods
- decrease in labour supply
- war in Ukraine.
The COVID-19 pandemic and the Russian invasion of Ukraine have played major roles in the rise of inflation rates. Global mobility restrictions in the early pandemic lockdown meant supplies could not travel with the ease they previously had. This disrupted the supply chain, causing bottlenecks yet to recover fully.
The pandemic also saw a massive shock to the labour market. In the United States, only 9.6 million people could not work because their employers closed or lost business due to the pandemic. In Europe, employment decreased by roughly 3.1 million workers between the end of 2019 and the end of 2020. Unemployment rates rose higher in the first three months of the pandemic than in the two years of the Great Recession (2007 – 2009). This loss of workers has yet to bounce back to pre-pandemic levels fully. With fewer employees, existing workers are more likely to ask for increased wages and compensation as they take on more responsibility alone, thus pushing inflation rates higher.
The COVID-19 pandemic also has affected consumers’ spending habits. With an inability to leave the house, demand and spending shifted from services to a significant focus on goods. With this increased demand for goods, manufacturers and suppliers struggled to keep up when the supply chain was already experiencing bottlenecks.
COVID’s last impact on inflation rates comes from economic relief efforts. Specifically, stimulus money is given out by the United States government. With each citizen receiving stimulus payments, consumers put more money back into the economy at a stronger-than-expected rate, and the economy could not keep up.
And lastly, the Russian invasion of Ukraine has added tension to the demand for goods. Russia and Ukraine are both major exporters of common global goods, and with the inability to grow and ship these products, retailers are struggling to fill the demand.
While these are the drivers of current inflation, experts predict that each element may have medium to long-term effects on the global economy. This means that while inflation rates may not continue to increase, they may remain reasonably stable over a medium to long-term period.
Applying agile pricing strategies to manage inflation efficiently
Promotions, discounts, dynamic pricing, price elasticity, shrinkflation, value-based pricing…there is no one correct way to go around price increases during times of high inflation. Actually, the worst thing would be not to act at all.
A lot goes into a pricing strategy, and when we add unpredictable events, it’s no surprise businesses feel disoriented. Based on our experience and analysis of the events, we extracted these key conclusions:
- Inflation rates are likely to stay high.
Experts suggest inflation will remain elevated at or near its current rate for much longer. This requires a longer-term view and strategy.
- Shoppers’ behaviour is changing.
95% of consumers plan to change their shopping behaviour. We have already seen customers switching to cheaper brands on some household and beauty products. Research into understanding these new shopping habits and expectations is essential as we face a (long) period of uncertainty.
- Discounts are sought after.
50% of consumers are reportedly seeking additional discounts and promos, and 60% of shoppers know the price of the products they buy regularly – an increase from 49% in 2010.. Price and promo strategies will need reviewing and fine-tuning to keep old customers and attract new shoppers.
- Brand strength & premiumisation is key.
Strong brands and premium products do not decrease the same demand as non-luxury products. While some brands saw consumers switching to their cheaper competitors, in the first three months of 2022, shoppers spent more money on premium dish detergents, sleep remedies and toilet paper. Consumers are opting for fancier products in categories where they perceive they’re getting a tangible benefit. Continue with premiumisation while optimising strategies for the different price tiers, as the inflation impact significantly differs across people and products.
- This inflation won’t lead to recession
A recession typically accompanies rising unemployment, which worsens spending and diminishes spending power. This time, the forecast is that the labour shortage will continue, so spending power will not be affected by unemployment but rather by inflation.
Trying to predict how this inflation will evolve is like gazing at a crystal ball. The global economy is frail, and the solution is nowhere on the horizon. But that doesn’t mean we should stand still.
Research matters – even more in chaotic times. Here at boobook, we believe that businesses that are already customer-centric and base their business decisions around customers’ needs and expectations are more likely to be less impacted by inflation. Acting fast and applying dynamic pricing are essential today. This doesn’t necessarily mean reviewing and researching all markets and brands daily, but rather focusing on research that strategically covers the globe and different products to give you a significant edge over the competition.
If you struggle with defining your pricing strategy, reach out to us! We’ll help you develop the most suitable pricing plan by focusing on your customers and assessing relevant business aspects.
