What to do about prices in a period of high inflation

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mins
June 20, 2022
Business Growth

A combination of factors, from post-pandemic supply shocks to the war in Ukraine, has forced inflation to levels not seen for several decades. And while more optimistic economists claim the worse effects will be short-lived, others fear it may be a longer-term challenge that the world economy faces.

What does this mean to you as a Founder?

How should your business be responding to a period of near double-digit inflation? And in particular, what might it mean for pricing?

 

1.    Keep costs close and margins closer: As your costs rise, keeping a tight grip on margins becomes essential. Even if you know any price increase will lead to a drop in demand, focus on margins and don’t be shy in passing higher costs on. Absorbing some costs may be in your long-term interest (if everyone feeds all inflation through, the economy gets more heated and trapped in an upward price spiral). A good finance director will help; allowing you to be forensic in understanding which costs are rising and what that means for margin. It might change the priority you place on different products, as former stars (maximum margin contributors) are no longer as profitable. The more data you have on all aspects of cost, price and margin, the more you can adjust strategy to suit the new market context.

 

 2.    Don’t miss an opportunity: Unless they live under a rock, your customers will know inflation is high. This may be to your advantage, as they will be expecting price increases. If demand is not that price sensitive, you might even be able to increase margins. But be wary of the fact that very high inflation across the board can change consumer psychology, with everyone looking harder at all their purchases as their income buys less. Increasing your price might force formerly loyal customers to switch to cheaper alternatives (something they wouldn’t consider normally). If you have some friendly and trusted customers you can ask, speak to them to gauge potential reactions.

 

3.    Play the long game: There may be some margin gains to be made short term, but you also need to assess longer-term implications. Can you turn the fact you are keeping prices down into a positive marketing message? You may benefit from a positive bump in short-term reputation, and later it may allow you to position yourself as the brand that cares about customers more than rivals. Others may talk about putting customers first, you can point to the actions that prove it.

 

4.    Communicate: The biggest fear about increasing price is in how to communicate it, or whether to try and sneak it through. It depends how you deal with customers, how regular and long-term your interactions are. Is this a subscription, or a series of individual purchases? But it also depends on your brand’s tone of voice. One interesting approach for the B2C arena is to announce the increase in the form of a sale offer. You mention that prices are going up and then offer existing customers the chance to buy the product at the current price until X. Handled correctly, this can turn a price increase into a positive sales event.

 

5.    Don’t try and hide: You may not want to be this blatant and it may not be appropriate to hold a sale (especially if you deal in long-term contracts). But if prices are going to increase, don’t try and hide it. You can package it in different ways, bundle in new additional elements (value adds), but never treat customers like idiots. The chances are that they’ll see though the ploy and resent not only the price hike, but the attempt to fool them.

 

6.     Make your own calls: Beware of sticking too closely to the actions of your competitors. It is fine to watch the market and even to follow what others are doing, but only as a positive strategic choice. There may be reasons for your competitors increasing prices that don’t apply to you. If they are forced to go high and you don’t have the same pressures, there may be a bonus in staying low and playing for market share.

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