How to raise prices in times of inflation 

Various scenarios have been tested to determine consumers’ perceptions of fairness. Price rises were considered unfair, for example, if a seller abused its pricing power in a shortage. The sense of unfairness is exacerbated if a firm uses its power not vis-à-vis one customer, but to exploit one customer in a specific situation – say when a landlord increases the rent upon learning the tenant has a new job closer to home.  

What does all this mean for pricing policy in inflationary times? The practical implications are straightforward. When you increase prices, the best justification is by highlighting cost increases (although never lie). Note also that customers are more likely to accept a discount reduction than a price increase. Economically, it’s the same. But psychological perceptions are different. Loss aversion dominates. 

Price rises can also be masked. So, try to avoid raising prices when the product remains identical. Creating “new” (if similar) products with new prices allows the establishment of new reference transactions. Finally, if a company uses its pricing power (as a monopolist, for example) to increase prices, customers may perceive this as unfair. The more choices they have, the less unfair it will seem. 

Before raising prices because of higher costs, companies should seize the opportunity to recalibrate their overall pricing strategies and improve their organizational pricing capabilities. Cost linked to the effect of inflation is only one of the four Cs that determine a company’s optimal prices. Executives should first update their insights on the other three: customers’ willingness to pay, competitors’ prices and offerings, and capacity constraints.  

Even if organizations know the optimal price, they are often ill equipped to execute a coherent pricing strategy in the relevant markets. To do this successfully, they must acquire and interpret meaningful customer and competitor insights related to willingness to pay. They also need to analyze the pricing economics of the organizations, and price elasticity in relevant markets.