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Taking a Balanced Approach to Pricing Through Inflation

Why the answer to current economic extremes isn’t an automatic price increase

U.S. food inflation has officially hit a record high for recent history. According to the Bureau of Labor Statistics, the Consumer Price Index (CPI) rose 7.5% in January 2022 compared to last January. And as well all know, inflation isn't contained just to food prices. While the gut reaction to pricing through inflation is typically to raise prices, we’d argue that’s not the best course of action for either you or your customers.

I’ll leave the inflation analysis and theorizing to the analysts and macro-economists who know far more than me about this subject. However, where I do have expertise is in the details of retail, and what the business course of action should be in response to inflationary dynamics. The recommendations I want to share aren’t just a remedy for the trials we face today; they can stand the test of time for whatever price-affecting hurdles lie ahead.

Lingering trends from COVID-19 make current-day inflation unusually challenging

While economic fluctuations are common, there are two unique dynamics at play that make the reality of inflation extra precarious for retailers. The first is shifting brand loyalty, and the second is the hyper-competitive nature of omnichannel.

Retail finds itself in a unique point in time, because, if you think about it, we haven’t before seen this degree of inflation happen simultaneously with a massive shift in loyalty. In response to the pandemic, most consumers had to dramatically adjust their daily lives, with household spending following suit. Because of budgets, product availability and safe fulfillment options, consumers became more willing to try new retailers and brands.

The growth of omnichannel has also made for incredible competition in the market. In the years prior to COVID, if I walked into a grocery store, that retailer pretty much “had” me. During a shopping trip, I may have skipped an item or two if it wasn’t a necessity that week or if I happened to buy it elsewhere, but for the most part, the retailer had a sizable share of my grocery-spending wallet.

Nowadays, with same-day home delivery, curbside pickup, and rapid shipping timelines, I can easily shop two or three retailers at one time, with fluid spending across channels. Not to mention, omnichannel makes it even easier to price compare.

Consumers are less loyal, and they have more options, so competitive pressure is at an all-time high. What’s a retailer to do with inflation eating away at already-thin margins? The answer is to think analytically about all of the factors.

Pricing through inflation requires a balanced equation mindset

When a cost increase crosses a retailer’s desk, a natural next step is to think, “How much should I raise my retail price?” As simple cause-and-effect relationships go, increasing the price helps to maintain current margins. But taking a price increase in this economic reality feels counterintuitive to delighting shoppers, especially price-sensitive ones. Grocery budgets are tight, and consumers are feeling the effects of inflation as well.

Retailers really ought to approach inflation with a desire to balance the equation, understanding that their response can be a combination of pricing increases and decreases. First, determine which items are most important to your shoppers, via a key value item (KVI) analysis. Doing so will help you to understand which items you absolutely shouldn’t raise prices on, unless you have an increase so massive that you can’t balance it out anywhere else.

After identifying KVIs, you may realize you can decrease prices for those key items, while taking price increases on less-elastic products in other areas of the assortment. This approach helps pay for the investment in the truly important, price-perception driving items.

This makes it a win-win scenario. The customer is not paying more for the products that they love, while you win on price perception at a time when other retailers could be turning customers away because of higher prices. Also, you’ll still be driving revenue and share of wallet. Finally, this approach helps to give you some breathing room to not take price increases on KVIs as quickly – you’re getting your margin on those background items instead.

Reverse-engineer a pricing strategy with consumer and competitive insights

At a time when brand leakage is at an all-time high, it’s critical to understand what your competitors are doing. You wouldn’t want to go into battle without understanding who you’re up against, right?

Having competitive analytics in place will help you understand how others are leveraging price to save their margins in an inflationary period, and will naturally help you determine how you’ll react in comparison. Matching competitors on price may be a more rudimentary tactic. No one wants to make the first move or be the first to raise their price – so ask yourself, “Do I have the insights to see who’s flinching first?”

Having a granular and intimate understanding of your customer is also imperative during inflationary times. An advanced analytical pricing solution can monitor demand trends, price elasticity, and basket comparisons. What happens when a shopper buys A? What else do they buy if B and C are in their shopping carts?

Going even further, if you have customer-level analytics, you can understand that Shopper X comes into the store more frequently than Shopper Y. Or Shopper Y will spend a certain amount in an average purchase versus Shopper Z. If you can connect your pricing solutions to your CRM, you can really start playing on loyalty programs, too. If you have loyalty, you won’t lose customers during time of inflation.

All of this is holistic. It’s not just about making the right decision on pricing when a cost increase comes. It’s about combining tactics in order to build a comprehensive approach to manage our present inflationary timeframe.

A balanced approach is best, but only with robust analytics and data science

No merchant, no matter how well intentioned, can calculate the intricate nature of pricing dynamics across a product assortment. A retailer must have advanced analytics to understand impact. If you take a price increase here, how will it shift demand? What does that mean from an affinity or cannibalization perspective? You need a solution in place that can manage pricing rules and relationships within your assortment.

To find this balance and understand competitive standing, retailers need real-time access to the right data and analytics. Afterall, you can’t think critically about a situation if you don’t have all of the facts.

Start with the fundamentals. If you’re in the dark without data, or you’re taking price increases with basic napkin math, you’re not going to gain share, you’re going to lose customers, and this will be an even more challenging time.

Build a comprehensive approach for handling inflation

If you can understand what customers are buying and how their demand fluctuates in relationship to price, along with insights for where you stand compared to competitors’ pricing, you’ll be more than able to take the challenges of pricing through inflation in stride. Focus on what customers want the most. Give them price decreases, or make minimal increases, and then determine where you go to harvest your margin elsewhere.

There’s a lot to tackle regarding inflation, but this is right in our wheelhouse – responding to market variables like inflation is what Revionics’ solution was designed to do. Our core competency is to help adjust retail prices in a balanced and consumer-focused way, and we’d love to help you do that this year. Reach out to speak to a pricing expert today.

About the Author

Matthew specializes in Pricing & Retail Strategy, Corporate Strategy & Customer Focused Solutions. Matt is a leader in Pricing Strategy Development, Business Strategy Development & overall Corporate Strategy. Matt has a strong merchant background and experience with C-Level presentations. He has 20+ years of experience in Retail encompassing Consulting, Buying, Pricing, and Marketing across a variety of retail verticals, industries, and regions. Having lived and worked in France, Germany, Hungary and South Africa (with additional long-term engagements in other markets), Matt spent the last decade driving customer-focused success at Revionics.