Pandemic-induced inflation gave license to pass costs to consumers, and it worked for a while; but current efforts to implement traditional dynamic pricing strategies are falling short as inflation persists and a new economic equilibrium takes hold, says L.E.K. Consulting
BOSTON — Aug. 14, 2023 — Consumer businesses faced big cost increases over the past two years due to the lingering effects of COVID-19, and they passed the overage along, often successfully, to consumers to avoid profit erosion. Now, consumers — challenged by the talk of recession and continued inflation — are cutting back, trading down and purchasing in bulk.
This scenario puts the onus on companies to develop new, creative pricing strategies as levers to drive value in today’s macroeconomic environment, which resembles nothing the world has experienced in decades, according to How to Price in a Post-COVID-19, Post-Inflationary World, a special report from global strategy consultancy L.E.K. Consulting.
“During the COVID period, when it was possible to pass prices on to consumers, we may have lost sight of holistic pricing approaches. Now we’re in another new, unexpected economic equilibrium where prices have gone up by 20% in four years and wage inflation has only put about 10% more in consumers’ pockets, so they’re valuing items and expenditures differently,” said L.E.K. Managing Director and report co-author Rob Haslehurst.
“Even as inflation continues to level out a bit, we are still in a persistent inflationary scenario we haven’t seen in decades. While some companies have made efforts to revive holistic pricing and promotion strategies like dynamic and value-based pricing, many more have been reactive, in our view, and haven’t considered what the future looks like in passing through price — nor have they taken advantage of new tools and data available. There is always opportunity in pricing, which is really the key method for companies to show and realize their value to consumers, but never more so than now,” Haslehurst added.
New Opportunities to Maximize Pricing as a Strategy
The report points out that while price changes are in some ways more delicate than in the past, technology and data can lead to approaches that will allow companies to home in on and refine the timing of price changes, offering different prices to different customer groups, packaging strategies, and real-time adjustments based on inputs and fast-shifting consumer sentiments and perceptions.
“This is an optimal time to rethink pricing,” said Claire Morgan, L.E.K. Managing Director and report co-author. “Technology and the way people buy have opened up avenues to using pricing in a more sophisticated way than it’s been used before. Because of online shopping, you don’t need to worry about what’s written on the edge of the shelf — you have so much flexibility that you can adapt pricing and even packaging on a minute-to-minute basis if that happens to be a strategy that works for a particular product or service. What works and what’s implemented, as well as where their customers are in the ocean of spending and pricing, can be very specific to each company.”
“It’s time for a great pricing reset. In this new economy, and as we look to the evolution of the current cycle, companies should challenge themselves to price in a way that shares the company’s surplus with the consumer so they’re thrilled while the business is highly profitable. We believe that that mindset is at the heart of brand enhancement and increasing market share and company value. Those companies that have crept into a cost-plus mindset have to re-embrace value as the driver of pricing,” said Haslehurst.
About L.E.K. Consulting
We’re L.E.K. Consulting, a global strategy consultancy working with business leaders to seize competitive advantage and amplify growth. Our insights are catalysts that reshape the trajectory of our clients’ businesses, uncovering opportunities and empowering them to master their moments of truth. Since 1983, our worldwide practice — spanning the Americas, Asia-Pacific and Europe — has guided leaders across all industries, from global corporations to emerging entrepreneurial businesses and private equity investors. Looking for more? Visit www.lek.com.