Understanding the impact of inflation on pricing

With forecasts from the Bank of England suggesting a fall in inflation in 2024, the economic landscape is changing. As inflation shows signs of deceleration, leaders across the UK and beyond are left wondering what this means for business. In this article, we explore the current landscape and its implications for making strategic pricing decisions for the future of your business.

If you remember one thing when refining your pricing strategy, it’s that lower inflation doesn’t mean lower prices; it means prices that rise at a slower pace. Prices are still rising at a rate of 4% (in the year to December 2023). A slower rate than before, but still more than twice the target level for the UK.

Has your business adjusted prices in line with the rate of inflation?

Lower inflation aside, if your answer is no—your current pricing strategy hasn’t adjusted in line with the rate of inflation we’ve already experienced—then the real value of your products and services has already declined.

“If you charged ￡100 a year ago, you’d need to charge up to ￡104 now for that revenue to be worth the same.”

Pricing strategically to catch up with current inflation rates

The dominant players in an industry tend to have greater pricing power and are more proactive in shifting pricing strategies in response to rising costs. However, many small- and mid-cap businesses have been afraid to raise prices which has resulted in margins being eroded as costs have risen.

The fear of raising prices is often based on gut-led aversion rather than actual evidence that a price increase would have an adverse effect. This trepidation is widely prevalent, especially in those businesses that run frequent price promotions and discounts.

Pricing strategy helpline: How pricing consultants and pricing psychology can help

The expertise of pricing consultants and utilising some core principles of pricing psychology can become invaluable to businesses feeling unsure about how to adapt their pricing strategy to the market.

Pricing consultants bring a wealth of knowledge and experience, offering tailored advice that considers your unique market conditions, competitor landscape, and customer expectations. They can help navigate the complex dynamics of pricing strategies, ensuring that your decisions are data-driven and aligned with your long-term business objectives.

The psychology of pricing, on the other hand, taps into the behavioural economics aspect, understanding how customers perceive price and value. This approach can be particularly effective in times of economic flux, helping businesses to adjust their pricing strategies in a way that resonates with consumer sentiment and behaviour.

Best practices for pricing strategy

If you are like many businesses that have not kept pace with inflation rates, declining inflation is good news, but it won’t fix your margins.

There is no one-size-fits-all approach to maintaining margins as inflation ebbs and flows. Taking a holistic view across several factors beyond just inflation can help you understand what pricing strategy is right for you. The aviation industry is a great example. Airlines can maintain high prices and generate record profits despite the fall in jet fuel prices and inflation because the post-COVID demand for travel is so strong.

Pricing strategy assessments

Regularly assess your pricing strategy, taking into account:

• market demand
• competitor pricing
• profit margins
• costs
• FX rates
• customer needs and willingness to pay and other relevant factors

This holistic view ensures that your pricing strategy remains competitive and sustainable.

Evidence-based decision making

Don’t guess how the market will respond to price changes of any kind. Gather the evidence before setting your strategy. A simple way to do this is to run 5 interviews with customers who would be impacted to gauge early reactions. For online sales, structure a set of price experiments with a smaller audience to gauge impact.

By gathering evidence, you can demonstrate the absence of price sensitivity to give you confidence in raising prices.

Strategic pricing adjustments

Keep pace with small, regular price increases. This avoids the need for hefty price adjustments later down the road in order to compensate for lost time and money.

In fact, recent research published in Harvard Business Review has shown that a number of small regular price increases can actually encourage customers to buy because they expect that prices will rise again soon, prompting them to take action before that happens (Evangelidis & Gunadi, 2023).

If you decide to change your pricing strategy

Adjusting prices, whether increasing or reducing them, requires careful consideration. Approach price reductions with caution. While they can boost volume or market share, they often don’t lead to increased profit. Moreover, clear communication is key. Any changes in pricing need to be conveyed in a manner that cuts through the market noise, ensuring that customers understand and perceive the value proposition.

In contrast, price increases–when done strategically and backed by enhanced value, new features, or higher service levels–can bolster your brand’s positioning and profitability. However, you’ll want to balance these price adjustments to avoid alienating loyal customers or being perceived as profiteering.

Need help with your pricing strategy? Let’s work together!

Navigating pricing strategies in a shifting economic landscape requires a blend of strategic foresight, data-driven decision-making, and a deep understanding of market dynamics and consumer psychology. Leveraging the expertise of pricing consultants and employing psychology pricing principles can provide a competitive edge, ensuring that your pricing strategy not only meets the current market conditions but also positions your business for sustainable growth and profitability.

Remember, in the realm of pricing, one size does not fit all. Tailoring your approach to fit your specific market, customer base, and overall business strategy is key to navigating the complexities of pricing in a lower-inflation environment.

If you’re looking to get some expert advice on your approach to pricing or are looking to redesign your pricing strategy, make sure to get in touch with us! We can’t wait to hear more about your business and help you unlock new growth.