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As the pandemic has subsided, inflation has taken off. The Consumer Price Index rose 7.5 percent through January 2022, faster than at any time in the prior 40 years. Companies are grappling with rapidly rising costs that are passed on to their customers. Simply raising prices across the board is an option that, used as a blunt tool, can damage customer relationships, depress sales, and hurt margins. Businesses are caught between the proverbial rock and a hard place; re-pricing in an inflationary environment is necessary to sustain margins in a period of rising costs.

On a more positive note, this is an opportunity to develop better relationships with your customers by helping them address their own pains related to inflation. We see many businesses moving beyond a pricing conversation into a broader discussion that addresses their customers’ supply chain and inventory issues, credit challenges, labor shortages, and more.

How to Protect your Margins

Here are four ways to help you increase pricing for inflation while maintaining long-term value for your business and your customers.

1. Adjust discounting and promotions, and maximize areas that impact your prices, not the prices themselves.

2. Develop the art and science of price change

3. Plan options beyond pricing to reduce costs

4. Track jobs relentlessly

Customers will react differently to price increases according to how price sensitive they are and how much inflation has affected the cost of the products they buy. Instead of making broad price increases that may erode customer trust and demonstrate insensitivity, companies can tailor their inflationary price increases thoughtfully for each customer and product segment.

Little Caesars realized this when they raised their price on the $5 Hot N' Ready Pizza. When they raised prices sales fell flat. They quickly returned the promotion but added their "Extra Most Bestest" Pizza for $6 while keeping the $5 option. They were able to show value to the more expensive product by contrasting it with a cheaper option. Customers were able to rationalize spending an extra dollar to get more.

You can do something similar by creating a service or level that is not as comprehensive as your normal level but charge the same amount while raising your normal service price.

In order to make sure price changes are executed properly, sufficient reporting needs to be kept. If you increase your prices will you lose some jobs? If I do lose jobs, how many can I afford to lose but stay in the green? Am I increasing my prices enough to cover the increase in operating costs I'm experiencing? These questions can't be answered by how you feel, but rather what the data is telling you. Data will tell you how to fine tune your price increases to see if you raised them enough or too much.

What lies ahead

Inflation is a challenge for business leaders, but it also creates opportunities. The first is to maintain margins and fix the pricing mistakes of the past. The second is to help your salespeople move beyond pricing discussions with customers and establish a new normal. Companies that do this well will improve their revenues, margins, and customer loyalty.

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