Understanding Price Dynamics During Inflation | The Salesmark
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Understanding Price Dynamics During Inflation

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As supply chain disruptions wreak havoc on energy and food prices, resulting in scaling price increases that haven’t been seen since 1981, inflation is unlikely to fall to pre-pandemic levels for some time.

Sixty-six percent of consumers believe that some retailers are doing a better job than others at mitigating these price increases. In this new world of high price awareness, data-driven insights and responsive pricing strategies are given increased importance.

Changing consumer behavior

The 2021 holiday season saw consumer spending decrease through substitutions to lower-priced retailers, more emphasis on promotional buying, and consumers even foregoing spending on non-essentials such as electronics and travel. These consumer behavior changes pose real challenges for retailers. The category-specific demand variation requires them to make different pricing decisions at a granular level.

The need for responsive pricing

The key to responsive pricing in uncertain times is to prioritize science over gut feel. The broad price increases due to inflation are not the right course of action for retailers. More than 90% of customers plan to change their behavior in response to price increases.

This shifting consumer demand as well as lower brand loyalty, coupled with increased omnichannel competition, means that sudden price increases could lead to extreme demand responses from customers. However, repricing is necessary to manage cash flow, sustain margins, and grow sales. To preserve market positioning, decision speed in inflationary times must also increase tenfold.

Understanding price dynamics

Price dynamics go beyond retail pricing and affect all parts of the supply chain. With demand for certain products hampered by increased inflation and the cost of replenishing inventory going up, some retailers have chosen to “sit” on a set of their inventory.

This artificial decrease in supply works to drive prices up and unit sales down while waiting for consumer demand to catch up. It allows retailers to save enough inventory to sell at higher prices later.

Sitting on inventory can extend to delisting some products altogether, to increase the value perception of specific categories by limiting the number of premium products available.

Why automation is necessary

These tactics require a structured and automated way to incorporate variables like time-sensitive inventory, sales rate, and fluctuations into supply prices. They must be assessed together to predict future selling prices, supply costs, and renewal dates.

While retailers will eventually need to replenish their inventory, they can use predictive models to maximize the value of their current stock to avoid potential cash-flow problems.

Agile pricing

Increased price awareness, lower customer demand, and higher replenishment costs put the spotlight on retailers to excel at agile pricing.

Agile pricing is an optimized pricing approach that allows retailers to adjust to the market automatically based on pre-existing rules. In an inflationary environment, deploying such a tool becomes necessary to automate, manage and optimize prices in response to changing market variables.

Building a resilient pricing strategy

Pricing is a continuous process. Agile pricing allows retailers to test multiple scenarios and data points to find the optimal price for a given product at a given time. This iterative process provides retailers with inflation protection in an automated manner.

The response-and-adapt cycle of pricing ensures that time-misaligned changes in replenishment costs and consumer demand are continuously forecasted and adjusted automatically. This paves the way for a resilient pricing strategy.

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