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Recommended Reading for Inflationary Times

One topic that business owners and managers cannot escape from at the moment in inflation (or ‘shrinkflation’, ‘greedflation’ or ‘Putinflation’). And the challenge confronting many businesses is how to push through price increases (often to recover other companies price increases) without losing customers.

No Margin for Error, which can be found on The Economist website [$Paywall] explores that very challenge, but there is one paragraph worthy of caution:

 

“The ability to push through price increases as customers tighten their belts requires careful management. In contrast to the last high-inflation era, managers can use real-time algorithmic price setting, constantly experimenting and adjusting as consumers respond.”

Algorithms are not a silver bullet for pricing! It’s a questions that has attracted plenty of commentary and analysis over the last couple of years.

Recently, I was reading “Price Wars: How Chaotic Markets are Creating a Chaotic World” by Rupert Russell (Weidenfeld & Nicolson, 2022). The book doesn’t explore those price wars in business that we are used to hearing about, but rather the role pricing has played in conflicts in various corners of the world. We live in a world ruled by prices, and they can spark riots, revolutions and wars, according to Russell. Pricing was the reason Mohamed Bouazizi doused himself in petrol in Tunisia in 2010, which triggered the Arab Spring.

But back to algorithms. Russell also notes in his book that:

“When Anne Hathaway presented the Oscars, Berkshire Hathaway stock rose by 2.94%. But when she got in a car ‘crash’ the stock dropped by 0.84%. Computers were confusing Berkshire Hathaway for Anne Hathaway.”

If you are thinking about pricing algorithms, please think carefully.

Now back to inflation. Here are just three reasons why inflation is so dangerous:

    1. When prices are stable, business can plan better. Businesses don’t have to pay attention to changing price levels, which can make people reluctant to invest , harming long term prosperity, supplier relationships and trust.

    1. The message price changes send get distorted. Are prices rising because demand and supply in an industry is changing, or because the value of money is falling?

    1. And finally, inflation has a big effect on wealth distribution. Understand who your customer base is – it may change rapidly, especially if your customer base is not the most well off.

Finally, Australia will finally catch up with many other advanced economies (almost) and start (from October 2022) publishing a monthly estimate of inflation, alongside its current quarterly measure. It will be interesting to see the impact of this on inflationary expectations, and what, if any, effect its publication has on decision making by (say) the Reserve Bank of Australia, retail banks, as well as business that adopt cost-plus pricing.

Listen to this post on The PricingProphets Podcast, or any of these sites…

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