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Corporate Pricing Behaviour

 

In my book, “Overcoming Floccinaucinihilipilification: Valuing and Monetizing Products and Services”, I ask the question “wouldn’t the right people to ask about inflationary pressures be pricing managers? They are the ones setting the prices of products and services”.

Last month, Phillip Inman, writing in The (UK) Guardian (“Time to Take a Long Hard Look at Corporate Pricing Power”, 25th March, p41) concluded that “we are all poorer for a lack of understanding about corporate pricing behaviour”.

The article was in response to comments from the Governor of the Bank of England, who had said “I  would say to people setting prices – if we get inflation embedded interest rates will have to go up further and higher inflation really benefits nobody”.

I am someone who not only works in corporate pricing, but also helps start-ups and small and medium sized enterprises (SMEs) with their pricing. So I feel I am in a unique position to enrich people’s understanding of ‘corporate pricing behaviour’.

In the last 18-24 months, the media (as well as economists, unions and think tanks) have talked about at least five different types of “..flations”. They are:

Inflation: A rise in the price levels of products or services over a period of time (noticed how some economist and media now refer to inflation as the “cost of living” though?)

Greedflation: In the words of Matthew Lynn in The Daily Telegraph (25th March 2023)  “pinning inflation on a handful of corporations increasing their profit margins to exploit customers who don’t have anywhere else to go”

Excuseflation, described by the FT [$] as “when companies with market power seize on publicly reported disruptions to create legitimate justifications to increase prices…a problematic behaviour because it heightens inflationary pressures”.

Shrinkflation: Paying the same for less, i.e. the size of the product or service shrinks, (more on that here, beyond the FT Paywall)

Putinflation, which are price rises that can be attributed to Putin’s invasion of Ukraine

So, here are three corporate pricing behaviour insights to help the media, the Governor of the Bank of England and anyone else who is interested…

Insight #1: Many businesses did not increase their prices in 2020 and 2021. Nobody is talking about this now?! Many companies recognised the challenges businesses faced during lockdowns, and as a goodwill gesture, they refrained from increasing prices. Tech companies did it, health insurance companies did it, the advertising industry did it, just to name a few.

Insight #2: Companies added significant value to their product offerings, and thus to their customers during those years they didn’t increase prices. Two examples include developing contactless delivery options as well as contactless payment options. More on that here, in Managing the Schizophrenic Role of Costs in your Business

Insight #3: When the time was right, companies began increasing prices. These price increases drove the current bout of inflation as companies a) captured some of the price increases not executed in 2020 – 2021 and b) monetised the considerable value they added to their offerings.

One thing that behavioural economic has taught us is that the pain of the loss associated with price increases is twice as potent as the pleasure of a gain of long-forgotten price freezes in 2020 and 2021.

Inflation is like toothpaste: you can never get all of it back in the tube.

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