A sensible approach to managing pricing challenges in inflationary times

Inflation has been a hot topic for the last couple of years and as a consumer, you will be well aware of its impacts that often involve an adjustment to buying behaviour and lifestyle.

From a business perspective, inflation is a critical economic factor that has various effects. At a fundamental level, inflation refers to the rate at which prices for goods and services increase over time, however, it has far-reaching consequences. Inflation can lead to a decrease in the value of money, which can make it challenging for businesses to maintain profitability. Therefore, it is crucial for businesses to understand how inflation affects pricing and take appropriate measures to manage the impact in a planned and proactive way.

Snowball effects of inflation

You may find that inflation leads to an increase in the cost of goods and services your business relies on to operate. For instance, if the cost of materials, labour, or transportation increases due to inflation, your business may need to raise prices to cover these additional expenses. As a result, your business may struggle to maintain competitiveness.

Inflation also reduces consumer purchasing power. The decreasing value of money can make it challenging for consumers to afford the same goods and services they used to buy. As a result, your business may see a decline in sales and revenue, which can further impact profitability.

Strategies to tackle pricing challenges

To manage the impact of inflation on pricing, there are a variety of strategies you can adopt:

• Increase prices strategically. Increasing prices strategically involves a business evaluating its costs and profit margins to identify products or services that are more profitable than others. In such cases, they can consider increasing prices for those offerings while keeping prices for less profitable products stable or may choose to stop offering the less profitable products.
  It is also important to analyse your customer base for profitability, as certain sectors or customers may be more profitable than others. The focus of the business can then be on the profitable segments and customers.
• Reduce costs where possible. Optimising supply chain and negotiating with suppliers regarding costs are ways that businesses can manage the impact of inflation. Such measures can help to mitigate the need for significant price increases and maintain competitiveness.
• Approach discounts and promotions with caution. Businesses often consider offering promotions or discounts to attract customers. This can help maintain sales volumes, however, these tactics have to be carefully managed to ensure that the chosen promotions are sustainable and do not impact their profit margins negatively.

In summary, inflation is an important factor that businesses must watch to stay competitive and profitable. Inflation can impact pricing, reduce consumer purchasing power, and increase costs. To manage the impact of inflation on pricing, businesses can adopt strategies such as increasing prices strategically, reducing costs and targeting profitable segments and customers. By being strategic and thoughtful in their approach to pricing, businesses can navigate the impact of inflation and maintain their competitiveness.

Please contact a Nexia advisor in either our Auckland or Christchurch offices if you would like assistance in reviewing your pricing to ensure your business continues to be competitive and profitable.