Inflation accelerates in September

The U.S. consumer price index jumped three point seven percent year over year in September, an acceleration from the prior three months. Inflation remains a concern for policymakers, consumers, and companies.

Managers face a pricing dilemma

Most managers view dealing with inflation as a one-lever pricing strategy. They simply ask: How much of our higher costs should we pass through to customers? There is a better approach.

Tim Cook on unprecedented costs

Apple's executive chairman Tim Cook, known for supply chain expertise, said recent price increases are akin to a hundred-year flood. He added: I've never seen anything like it in any area in over forty years.

“I've never seen anything like it in any area in over 40 years.”

Butter's Barbecue pulls brisket

Butter's Barbecue in Sinton, Texas, calculated it would need to charge fifty-one dollars per pound to cover rising brisket prices. Instead of raising prices that high, it pulled the popular item off its menu.

Consumer patience has limits

Consumers have been understanding to annual price increases, but there is a limit to their empathy. The University of Michigan's Consumer Sentiment was at the second lowest point since the survey started in nineteen fifty-two.

Stop obsessing over margins

Managers often focus excessively on gross margins, viewing high margins as a signal of strength.But focusing on maintaining margin often results in missed profit opportunities.Holding prices steady or lowering them strategically can increase gross profits.

The cost-plus pricing fallacy

The biggest pricing error is setting prices by marking up costs by a fixed percentage. Customers do not think this way. With cost-plus pricing, a cost increase gets magnified through the formula, creating domino inflation.

Mitigate price increases selectively

Companies should rigorously question whether to fully pass along cost increases.A lower price drives higher demand, increases sales volumes, and could boost total profit.The company may also sell complementary products and attract new customers.

Apply surgical discounts strategically

Couple cost pass-throughs with aggressive discounting to keep price-sensitive customers and lure new ones from competitors. Create hurdles like coupons, rebates, price matching, and off-peak discounts to let price-sensitive customers identify themselves.

Raise prices of other products

Absorb part of a price increase from a high-inflation product by boosting prices of other products that now appear relatively low cost.

Boston Consulting Group research

Research by the Boston Consulting Group found that a thoughtful approach taking into account product price sensitivities can generate at least twice the profit impact of blanket cost-driven increases.

Create product bundles

Bundling incentivizes customers to purchase items they otherwise would not, typically using a discount as the carrot.

Introduce stripped-down versions

Offering a lower-priced version keeps price-sensitive customers and attracts new customers from rivals frustrated with continued annual increases. Most airlines have introduced Basic Economy ticket versions with restrictions like no advance seat assignments.

Offer premium product versions

Every company should employ a Good-Better-Best strategy.There is an often-large segment of customers interested in purchasing the Rolls Royce version of products even in an inflationary economy.

Link prices to objective data

Customers are receptive when companies offer clear explanations for price moves supported by data.Research by Daniel Kahneman, Jack L.Knetsch, and Richard Thaler found consumers more willing to accept cost-justified increases.

Secure long-term contracts

Clients understand mutual benefits to signing longer contracts: reduced marketing costs and reduced uncertainty. A company might offer a ten percent price increase for a one-year contract but reduce it to three percent annually for…

Reframe prices to fit budgets

Apple's nineteen ninety-nine dollar Duo foldable phone becomes eighty-three dollars and twenty-nine cents per month with zero percent financing. Apple's leasing program reduces the monthly fee to fifty-seven dollars and ninety-nine cents.

Pricing discipline creates lasting value

Companies that navigate this inflationary period best will use pricing creatively, employing a mix of strategies that generate the most profit. The pricing discipline driven by inflation will remain valuable long after inflation subsides.