Highest inflation in nearly 40 years
January 2022 was the month with the highest inflation in almost 40 years in the Netherlands, with no less than 6.4% compared to a year earlier. This made it just barely higher than the inflation rates in September 1982. According to the Central Bureau of Statistics in the Netherlands, this inflation is mainly due to the increased energy prices, which have risen exponentially in recent months. This is due to the strong recovery of the economy after corona and various obstacles in the logistics chains. Other products such as clothing, shoes and transport have also become a lot more expensive. Even though the Netherlands is not the only country with high inflation rates in the world, you see that the Netherlands has higher inflation than most other countries in the EU.
Because energy is used for the processing of raw materials and transport, it will become more expensive for many producers to make products. They are likely to pass on the extra costs to intermediaries and ultimately the consumer. So companies that sell products to customers are likely to incur higher costs, often resulting in a lower profit margin. But how do you ensure that your margin is not compromised? By using the right pricing strategy!
Often you cannot simply pass through a cost increase to your customers without it having an effect on other factors, such as demand. Therefore SYMSON has researched the most effective tips and pricing strategies for you during times of high inflation rates.
5 Practical pricing tips to manage inflation
Before you completely turn your pricing strategies upside down, it is also possible to make other adjustments.
1. Reduce costs
Before companies start raising their prices due to a cost increase, companies can also see if they can reduce costs elsewhere. By reducing costs, you can also achieve the same margin as before. The difficult thing about this is that this form of margin improvement is already reasonably good for many companies. Therefore it you may not be able to reduce your costs even more, which sucks, we know.
2. Price elasticity
Price elasticity is key when it comes to increasing prices. For some products it is very easy to increase the price without seeing the number of sales decrease, but for many products this is not the case. Many products will sell less if the price rises significantly as customers switch to alternatives or turn to the competition. Therefore, it is good to know how your product will react to a price increase.
3. Watch your competition
Most companies do not have a monopoly and face competition. Competitors’ prices also affect how your prices are judged by customers. In a positive as well as negative sense. It is therefore wise to react to the competition during times of inflation in order to be able to distinguish yourself as a company.
4. Product roles
Before you change the prices of all your products, it is useful to first distinguish what role a certain product plays in your product assortment. Is it a key-value item (a product that should attract customers to your (web) store) or is it a product that yields you very high profit margins? Some companies may have a pricing strategy that applies to all products. But is often much better to divide your assortment into product groups with different roles. This way you can apply your pricing strategies much more specifically.
5. Commercial positioning
Sometimes it may be possible to expand your pricing strategy with new commercial initiatives, without necessarily increasing your prices. An example of this is “shrinkflation”, which keeps the same price for a product but reduces the amount that customers get for that specific price. Let’s say a battery wholesaler sells a package of 10 batteries for 10 euros, but inflation increases the costs. In order to sell a pack of batteries for 10 euros with same profit margin, the wholesaler may decide to put 9 batteries in the pack instead of 10. In addition, it may also help to offer no (or fewer) discounts or deals, which for some wholesalers is included in the pricing strategy. This ensures that you sell your products for a higher average price than before.
Best pricing strategies for high inflation rates
You can use a number of pricing strategies to increase your price. Individually, but also in combination with each other, for an even better result! Click on the pricing strategy to read a full explanation for each strategy.
Cost-plus pricing model
With this pricing strategy, you calculate the cost of a product and add a profit margin to determine the price for your product. During a period of high inflation, it is useful for many companies to let the price of the product increase in line with the cost of the product. This is easy and convenient to implement. But if you only apply this pricing model, it can make your product less attractive to consumers in comparison to the competition.
Competitive pricing model
With this pricing strategy you base your prices on the competition. You then try to always be the cheapest or, for example, to always offer the average available price. During times of inflation, when your competitors are also making changes in prices, it is more than useful to keep this information in mind. This way you can continue to distinguish yourself from the competition, completely in line with the company objectives.
Key-value item pricing model
With this pricing model you try to get the customers to your (web) store with discounted prices for popular products. You then try to take profit on products that customers buy in addition to this popular product. During times of high inflation, it may be helpful to divide your products into key-value items and “profit margin” items. This way you can continue to attract customers with cheaper prices for customers’ favorite products, but at the same time you can make more profits on the other items by setting the margins there a lot higher than inflation.
Dynamic pricing model
For many companies, a dynamic pricing model is the best option during times of inflation, especially if your company has a lot of different products. A dynamic pricing model is a pricing model that automatically adjusts prices to changes in various factors. For example, for an increase in costs, but also weather conditions or the prices of competitors can be included in a dynamic pricing model. By automating this with software and with the help of AI and algorithms, this model saves you a lot of hassle. The work is done for you and you also get the optimal prices for your product!
How do you implement a new price during high inflation rates?
Passing a new price on to your customers can be done in different ways for companies. Companies can implement a large price increase in one go or frequently implement several small price increases. In general, products that do not improve significantly in terms of performance are can best get a one-off high price increase of several more smaller price increases.
Whether you have to communicate a price increase to customers also strongly depends on what you are selling. You can often say that if someone from your organization has personal contact with the customer, you can explain why the price has risen, but that this is not necessary if you do not have personal contact. Communicating price increases is therefore often more suitable for B2B companies than for B2C companies.
During times of high inflation rates, you as a company can come under pressure from higher production costs. In order to remain profitable, it is advisable to adjust and optimize your pricing strategies. Especially the dynamic pricing model in combination with other pricing strategies is the best way to keep your prices optimal during times of high inflation.
SYMSON helps companies manage prices through intelligent pricing software for retail, e-commerce and industry. We help you by automating simple tasks and optimizing your margin by combining multiple pricing models.
Do you want a free demo to try how SYMSON can help your business with margin improvement or pricing management? Do you want to learn more? Schedule a call with a consultant and book a 20 minute brainstorm session!