Setting a price in the time of inflation
Setting prices is one of the most important business decisions, something which has been underscored by this past year’s inflationary pressures. Inflation has for some firms meant that they have been forced to think more thoroughly about their pricing, because doing nothing has not been an option due to cost increases. These firms have discovered how pricing affects profitability. For firms working more systematically with pricing, it has been an opportunity to utilize customers increased price acceptance to develop their profitability. For both groups it means that pricing have increased in strategic importance.
Importance of price acceptance
However, utilization of presumed increased price acceptance is not without threats. Firms may overestimate price acceptance and customers willingness to pay. Furthermore, inflation has brought about increased focus on the fairness of prices, sometimes termed greedflation. Many firms have here experienced media focus and customer complaints based on price increases being considered unfair. Such fairness evaluations arise in particular contexts and are based on different definitions of what constitutes fair prices. This makes it difficult to evaluate whether a given price change will generate fairness issues. Fairness concerns nonetheless affects what constitutes the “right price”, because if customers react emotionally and refrain from purchasing products, price increases may reduce profitability. Fairness issues thus induce risk for the price setting process. Or alternatively, some companies have been afraid to raise prices (to a higher extent) and therefore, experience thinner margins as the executed price increases are not covering inflation.
We will be discussing questions such as:
- How has inflation affected firms’ approaches to price setting?
- How has inflation changed customer perceptions of prices?
- How do you estimate customers’ willingness to pay, and how do you utilize insights of customer value in price setting?