How to Optimize Pricing and Revenue Amidst Inflation

Inflation may be the scariest thing for most companies, but it can also be a blessing in disguise.

In this blog, we will discuss: 

• Inflation as an opportunity for pricing and revenue management
• Three ways to stay competitive amidst inflation
• The shortcomings of your existing tools
• How Buynomics helps you succeed

We are slowly shifting into disinflation mode. In 2022, the U.S. experienced a 9.1% price surge, the biggest increase since November 1981. However, the consumer price index (CPI) rose 3.0% this year, the smallest rise since 2021, which means the current annual inflation is just a third of what it was last June.

While we are still in the thick of inflation, which is a scary thing for most companies when it comes to pricing, there are unique opportunities that come with this challenge.

It's like in Formula 1:“If the sun is shining a good driver can overtake one car per round; if it is raining, he can overtake ten.” 

Competing in today’s environment is much like race car driving. If conditions are normal, the differentiator is your car – or in your case the overall condition of your company. But if conditions are difficult, it all comes down to the driver’s skill – or in your case, how agile and prepared your revenue management and pricing organization is.

Bottom line: Inflation is a value-opportunity for great revenue managers and companies to move ahead! But why is that the case and how can you stay ahead of the curve?

How inflation is an opportunity for pricing and revenue management

While product and pricing decisions are always impactful, in normal times, an equilibrium developed in mature markets. One sided deviation from this equilibrium – especially changing prices – is often not possible. External shocks – like inflation – disrupt this equilibrium and open opportunities.

Three main factors add dynamism:

Customers are more likely to change their spending behavior or their price sensitivity to certain goods. This is highly dependent on the category and on how income grows compared to inflation. Figuring out the dynamics at play in your industry and region is key to making the right decision.

Costs change

Depending on your industry, your costs of goods sold (COGS) are influenced by inflation. If you produce bread, for instance, an increase in flour costs is a challenge because customers don’t care about your costs. You need to optimize your pricing given both costs and price sensitivity. Being able to do so is the key to success in pricing amidst cost inflation. 

Competitors change prices, promotions or products

Inflation is an exogenous event which affects most of your competitors in similar ways. However, they will not all react in the same way, nor will their actions have predictable effects. Competitors changing prices or pack sizes is one of the most important factors to bear in mind when planning your pricing; consumers will decide between you and their next best offer. 

In a situation where changes in competitor prices are happening more frequently and are becoming more significant, it is crucial to quickly understand the new circumstances, as they bring both opportunities and threats.

Three ways to stay competitive amidst inflation

To emerge stronger in this new situation, these three steps are necessary:

1. Diagnosis: Map the new territory

• Understand and quantify customer behavior changes.

• Understand cost changes and its implication on your product cost and margins.

• Gather information about your competition’s price, product and promotion changes and understand its impact on your offering.

2. Guiding policy: Harvest opportunities shown by the diagnosis

• Create general guidelines on how to deal with the new situation.

• This can be existing guidelines or new ones, e.g., focus on market share in segment A; No price increases higher than x%. At least y% below competitor A.

3. Coherent actions: Concrete steps

• Determine a set of concrete actions to benefit from the opportunities found in the diagnosis considering the guiding policy.

• For example, offer product X in channels A and B; Increase price of product X while decreasing price of products Y and Z; change promotion Y for product X on channel A

The challenges to follow through are mainly in steps 1 and 3.

Diagnosis: Even though data is available, the tools to make sense out of it are missing. This is particularly true for customer behavior.

Coherent actions: Decisions are avoided due to high uncertainty about how customers will react to offer changes.

However, existing legacy tools don’t provide clarity on market reactions.

The shortcomings of your existing tools

Here are the main reasons why your existing tools are holding you back from remaining competitive in an inflationary environment.

👁️‍🗨️ Customer behavior is oversimplified: Excel-based models as well as “leading” pricing software often use elasticities or cross-elasticities. In our blog post, “Price Elasticity - the Good the Bad and the Ugly,” you’ll learn that elasticities condense consumer preferences down to one number. The more change in the market the more error elasticities and cross elasticities include.

💰 Costs are not harmonized with prices: In most pricing solutions, costs are not properly harmonized with prices. They either put too much weight e.g. in cost-plus pricing or too little e.g. in elasticity-based pricing. As most professionals know this, they put different weights or averages on these factors, which does little to avoid major errors.

🆚 Competition is largely ignored: Most pricing solutions are unable to measure how you should position yourself next to your competitors. As with costs, professionals often end up averaging or weighing competition as a factor based on gut feeling or isolated studies. However, as competition changes their portfolio more often, these generalizations become less and less accurate by the day.

In summary, inflation brings a lot of opportunity but is challenging to exploit using today’s tools. So how do you succeed in leveraging inflation as a competitive advantage?

How Buynomics helps you succeed in pricing and revenue management amidst inflation

With inflation as a realistic long-term prospect, the imperfections of current solutions are becoming increasingly evident.

At Buynomics, we realized that an ever-faster changing world requires a new solution. We leverage a clever machine learning algorithm to simulate how your customers react to real-life price and product changes. This novel approach does not rely on price elasticities and avoids the pitfalls of current models, which require gut feeling to average and weigh different factors into a holistic picture.

Instead, Buynomics enables you to succeed in pricing amid inflation through four key features:

⚡ Immediate feedback on changes in buying behavior, allowing you to better tailor your offering to consumer needs.

🖱️ One-click price optimization enables you to find the best price regardless of the market circumstances and your cost structure.

🚀 Portfolio optimization features enable you to use pack-size and product array as a lever to succeed in pricing.

🙌 Including competitors as well as your own costs gives you a holistic picture of the context in which you are operating. 

These benefits are possible thanks to our novel technology, which makes Excel and elasticities redundant. But how does Buynomics come up with those insights? By combining behavioral models and customer-specific data, we create an accurate model of your end consumer called Virtual Shoppers, which allow you to predict their actions and optimize accordingly.

Figure 1: Buynomics combines behavioral models and customer-specific data to create an accurate model of the end consumer.

This makes Buynomics the machine learning solution for the revenue manager of tomorrow – for a business that is not only more dynamic, but more profitable as well.

Do you want to learn more? Watch our webinar on how to tackle inflation with the right pricing approach or download our free infographic on Pricing Amidst Inflation. 👇