Inflation in the UK has soared to 9%, with 10% forecast, resulting in a 40-year high primarily due to escalating costs of energy, food, transport, and the ongoing conflict in Ukraine.
As business costs go up, most companies will need to raise their prices to remain profitable – assuming they have not already done so. As a result, millions of lower-income families are feeling the pinch as they bear the brunt of the cost-of-living crisis.
The current situation differs from previous rounds of high inflation for two main reasons. Firstly, most working adults in the UK have never experienced this level of price increases. Secondly, this period of high inflation is taking place after two years of collective sacrifice and hardship following the global COVID-19 pandemic.
Many consumers now worry that purchases they delayed, such as holidays, concerts and family outings, may now never happen. In this environment, price optimisations become a critical aspect of any business strategy and must be carried out in a way that does not negatively affect the brand.
Brands that are perceived as empathetic to consumer pricing fears – and positioned as weathering the inflationary storm with consumers as opposed to using the global crisis to overcharge them – will be much more likely to flourish. Through strategic pricing, brands can be perceived as being both responsible and responsive to consumer needs. On the flip side, price increases that appear merely reactionary or opportunistic are like to worsen consumers’ fears and disappointments about their ability to ‘return to normal.’
For those businesses that are forced to raise prices, there are three important ways this can be done strategically without eroding brand value.
1/ Knowledge of price elasticities – Not just for the category but for your individual brand
Understanding individual price elasticities in a high inflation environment will be critical to maintaining market share and optimising pricing strategies. Most brands will be able to accurately calculate how much they will need to raise prices to meet revenue. However, those calculations need to be tied to what the market will support, today. Though highly desirable brands will likely be able to handle price increases better than other brands, the price premium a brand can demand is likely to be smaller during an era of high inflation.
2/ Know your customers – Which segments will accept price changes, and why?
Some segments of shoppers will tolerate price increases better than others. For example, the high-end shoppers of luxury brands are typically the most insulated from price shocks, and shoppers with a strong emotional attachment to a brand may be more drawn to it during times of uncertainty as a means of maintaining a sense of normality. However, in the first case consumers may be purchasing status, and peace of mind in the second – both of which can be difficult to accurately price
3/Communicate effectively about the price changes – Be open with consumers about the reasons for price increases
Rising transportation costs and labour shortages are contributing to rising prices which consumers will not hold brands accountable for. Just as consumers want to support brands they perceive are making the world better, they will be more likely to support those they believe are trying to minimise the impact of rising global prices rather than contributing to them. Communicating that “we are in this together,” or that you hope that the price increases are only temporary, can go a long way to building a sense of empathy and trust.
Sam Sturgeon is head of marketing sciences at Hall & Partners.