Guide to a Pricing Strategy during High Inflation

By Jonas Timonen

Highest inflation record!

A record-breaking high inflation rate in the Euro Area is expected to happen according to Eurostat, the statistical office of the European Union. Indeed, the annual inflation rate has continued to increase in May 2022 from 7.4% to 8.1%. The high increase in energy prices is mainly driving the increase of the inflation rate.

This blog post will discuss:

What is price inflation?
How can inflation be measured?
How to adapt your pricing to a high inflation rate?

So, without further ado..

What is price inflation?

Price inflation is the rate of increase in prices of a collection of goods and services over a period of time. In simple terms, high demand and low supply may lead to price inflation. Inflation can also be caused by an increase in production or service costs.

The current high price inflation in Europe is triggered by supply chain disruptions, caused by logistic challenges in the time of the pandemic. In addition, higher consumer demand post-pandemic, increases in energy costs and the war in Ukraine, are all contributing factors to increased inflation.

How can inflation be measured?

There are several ways to measure the inflation rate. One of the most popular metrics is the Consumer Price Index (CPI), which measures the overall change in consumer prices over time for a collection of goods and services (including food, cards, education and recreation).

Another measure of inflation is the Producer Price Index (PPI). The PPI measures the overall change in prices paid to domestic producers for their output. For instance, this includes prices for fuel, farm products, chemical products, and metals.

Both CPI and PPI are important metrics as they reflect changes in the prices of goods and services. While PPI is seen from the perspective of manufacturing, CPI is seen from the perspective of consumers.

How to adapt your pricing with inflation?

Most importantly, simply raising overall prices to manage inflation may damage customer relationships, pressure sales and hurt your margins. Re-pricing is necessary to maintain margins in a period of rising costs.

On a positive note, this re-pricing situation calls for a targeted pricing strategy. It can serve as an opportunity to clean up any pricing mistakes made in the past and drive more sustainable business growth.

Here are four practical examples of how you can adapt your pricing strategy:

1. Adjust less-profitable pricing decisions done in the past

Review your product catalogue:
- reduce over-promoted items based on the category roles or decrease the number of promotions with little results.
- reduce the number of customer-specific items that are not profitable or universally sold.
- implement ‘shrinkflation’; that is, reducing the size of your product catalogue to meet more profitable margin or maintain the price point.
- group products together into bigger optimizable product groups.

Analyze your customers: Revise unprofitable or overfunded customers.

Review your service agreements: Adjust service pricing terms and conditions to align with market conditions (for example: a 30% – 50% increase in shipping cost over the last two years).

Review your business & pricing strategy:
- re-examine the brand ladder strategy (for example, price parity between SKUs);
- construct a new (and delete the old) channel- and occasion-based pricing design based on the post-pandemic consumer behaviour and expectations.

2. Focus on effective communication

Any changes in the pricing structure need to be supported with effective communication. Firstly, discuss the price increase in the context of your partnerships amid the ongoing market conditions. Secondly, make sure to equip sales teams with data-driven insights to help them match your value proposition.

Finally, the conversations should also include the ‘value’ perspective or price signalling. Focus on providing a good quality product that can justify the higher price rather than compensating the quality for a lower price.

3. Explore alternatives beyond pricing to reduce costs

Another strategy is to re-design the product to adjust to higher production costs. This can be modifying the materials, packaging or product features.

Try to explore your category management as well. To bring costs down, companies can:

reduce inventory level
adjust the number of assortments
minimize SKU complexity
source from preferred suppliers

Many leading companies can identify product substitutes within their portfolios. Those products are similar to a private label that can be sold at a lower price than branded products. Identifying these can help maximize profit and increase value for the customer.

4. Develop a targeted pricing strategy

Conventional across-the-board price increases, which treat all customers the same, are less effective.

Customers respond differently to price increases, depending on how price sensitive they are and how loyal they are to particular products/services.

Companies need to balance between the product role in the assortment and the price elasticity of each product. Is the product a key-value item that needs to be price competitive or does the product yield a high-profit margin?

Calculate your products’ price elasticity with a free calculator

Additionally, some believe that price increases don’t have much impact on sales decreases. Many products will actually sell less if the price increases significantly, as customers tend to switch to more affordable products. Companies could better understand this price elasticity by doing rapid price testing, which is one of the current top pricing trends.

This personalization approach has long been used by retailers. They tailor promotions to consumers whom they know to be more price-sensitive, while passing the cost increase to products bought by less sensitive consumers.

Way forward…

Value capture must be enabled to evaluate the impact of each action and strategy. A fundamental key to continuous performance management is to track execution accurately and by establishing a rigid data infrastructure. This can help you identify optimum margins, modify executions, validate assumptions and enforce price increases.

Learn more and identify the most optimal price for your product amidst the high inflation rate! Our intelligent software and AI could automate the process for you and help you increase your margins. Speak to our pricing expert or book a free demo!

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