For the first time in a decade, many companies have started to consider the impact of inflation on their operations. Although it is not yet clear how long the current inflation wave will last, a survey conducted in 2021 indicated that it could last for years. The Federal Reserve also stated that the current inflation might not be as transitory as previously believed.
The traditional response to inflation is raising prices or cutting corners to reduce costs. This is a trilemma that most managers have to face. They can either upset their customers by raising prices or cutting their margins.
Instead of reacting to inflation as a tactical challenge, managers should consider it an opportunity to improve efficiency by developing better options. This can be done by creating a strategy focusing on the factors affecting their operations. If inflation persists, managers should consider other strategic options such as repositioning the brand, raising the prices, or even replacing the price model. These are not mutually exclusive, and they can be pursued together.
Pivot and Focus
One of the most common strategies companies can use to reduce inflation’s impact is bundling or unbundling existing products. This can be done by developing new value propositions or exposing customers to lower prices for specific services and goods. They can also use behavioral economics to improve costs and attract more profitable customers.
Most managers think that price sensitivity is the most critical factor that affects their customers’ response to changes. However, this is not the case. They should also consider other factors such as quality and quantity sensitivity.
The quality of a product or service is also a critical factor affecting customers’ response to changes. Suppose a company has several features that its customers can’t live without. In that case, it can consider removing these features from its products or services and creating new versions that are more affordable.
Due to inflation, many companies have realized that their offerings are either underpriced or overpriced. This is a massive opportunity for managers to improve their product positioning. One of the most common ways companies can reduce the impact of inflation is by cutting the prices of their products. This can be done when a company invests heavily in marketing to maintain its value proposition or when its offerings are losing their competitive edge.
Another strategy that companies can use to reduce the impact of inflation is by developing a higher price tier for their products. This can be done through the establishment of a more transparent pricing structure. The opportunity to reduce the impact of inflation is also promising for companies relying on low prices to gain a competitive edge. Underpriced products can damage a company’s brand image and prevent it from developing effective marketing strategies.
Reevaluate Price Model
After seeing the success of subscription models and the “my-product-as-a-service” model, many companies have started considering new pricing strategies. The immediate need to react to the rising cost of doing business provides them with an opportunity to implement these plans now.
Over the past decade, various industries, such as education, software, and industrial production, have implemented new pricing strategies. These changes have allowed companies to reduce the impact of inflation and keep their prices competitive.