As inflation soars to its highest rates in 40 years, it’s critical that businesses have a strategy to respond to fluctuating costs and prices. Pricing during today’s inflation is particularly challenging because people are exhausted and emotionally fatigued from dealing
As inflation soars to its highest rates in 40 years, it’s critical that businesses have a strategy to respond to fluctuating costs and prices. Pricing during today’s inflation is particularly challenging because people are exhausted and emotionally fatigued from dealing with extreme uncertainty created by the ongoing pandemic, the war in Ukraine, and fears of recession.
These stressors affect the fabric of markets and society — amplifying frustration with companies and the overall economy. There are strategies that companies can use to earn consumers’ trust during inflation. We have documented these strategies by studying periods of runaway inflation. For example, in Israel during the early 1980s inflation rates rose to over 100% for multiple years, climbing to 430% in 1985. At its extreme, this is known as hyperinflation (inflation of 50% or more per month). The worst hyperinflationary episode in modern history was experienced by Hungary in July 1946, where the inflation rate was 41.9 quadrillion percent, causing prices to double every 15.6 hours. We’ve studied how businesses responded to several of these periods, with a particular focus on Israel.
Three major lessons from hyperinflationary periods can help managers, consumers, and societies better cope with and more successfully navigate their current inflationary challenges. Together, they can help companies thrive and lessen the burden that inflation places on consumers as well.
Reduce the company’s “costs of changing prices”
Our research shows the costs of changing prices can be far greater than managers recognize, especially during high inflationary environments. We documented the average costs of changing prices per store at four major U.S. grocery chains using in-depth studies of their weekly price change processes, analyzing workflow schematics, and undertaking detailed in-store time and motion measurements of each process step across multiple stores at each chain.
The costs include the labor cost to change shelf prices, the cost of printing and delivering new price tags, the costs of mistakes made during the price change process, and the cost of in-store supervision of the price change process. Applying these costs to the largest U.S. grocery chain, Kroger, would yield an annual cost of $291.9 million in total across 2,757 of their stores. Now, imagine a hyperinflationary scenario like Zimbabwe in 2008 where prices doubled every day. These price change processes would be undertaken seven times a week, rather than once a week. This would cause the total annual cost of price adjustment to balloon to $2.04 billion a year.
Successfully dealing with high inflation requires managing pricing processes to reduce the costs of price adjustment. This often involves using simplified pricing rules or adopting new pricing technologies. For example, Israeli booksellers went from pricing individually to pricing groups of books by assigning letter codes (A, B, C, etc.) and posting a price list. In Brazil, retailers digitized price adjustments with electronic shelf labels, which eliminated the labor costs required to manually update prices across hundreds of products now being re-priced multiple times (rather than once) per week.
The costs of hyperinflation can also be curtailed by grounding prices in more stable currencies. During Israeli runaway inflation, quoting prices in dollars was frequent for durable goods and housing — even at amounts greater than citizens were legally allowed to hold. In Venezuela during the current hyperinflation, sellers are adopting peer-to-peer cryptocurrency payments, allowing street vendors to price with digital coins. By simplifying processes, investing in technology, and presenting price stability, organizations can reduce the costs of changing prices to navigate inflationary pressures.
Reduce customers’ “stress of uncertainty”
During runaway inflation, it is hard to know the value of anything because inflation creates volatile price fluctuations and distorts relative prices. Routine purchases become more complex and demanding, mentally and emotionally. The stress of uncertainty from inflation weighs heavily on customers and is made worse by the uncertainty of the ongoing pandemic, Ukraine war, and fears of recession. As managers, successfully dealing with high inflation requires focusing on ways to help reduce the customers’ stress of uncertainty. This often involves using strategies such as commitment and indexation.
Managers can commit to absorbing some future volatility through offering payment plans like Israeli stores did across many categories during runaway inflation. For example, an Israeli guitar selling for a price of 100 shekels pre-inf