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How to think about inflation and new prices

As we all have noticed, inflation is causing prices to skyrocket. Not all at once, but segment by segment we see prices climbing up to a 30% increase since the start of the year. It is clear that it’s now more important than ever to really think about your pricing strategy.

How much should I increase my prices with?

Let’s say you are producing baby food, and your suppliers have increased their prices with 20%, does this mean that you should increase your prices to your customers with 20%? Seems fair perhaps, but this line of thinking is wrong.

The demand of your product has to do with something called elasticity in demand. If something is inelastic, this means no matter your income or the price the demand is unchanged. Of course nothing is ever ‘perfectly’ inelastic, but electricity is something that we can certainly decrease our demand in, but never go fully without.

In contrast, when something is elastic we are very sensitive to price changes. Such as an increase in price for soda, we are more happy to skip that and save our money.

What does elasticity mean for me?

Well, this is impossible to generalize. If we take the example with the baby food, how elastic would you say that commodity is? You have too feed your child of course, but there are alternatives. Perhaps people start making their own baby food instead. That means the demand for your product would decrease if you set the price too high.

But of course, your margin has decreased with your costs increasing. Perhaps you are no longer making a profit unless you change the price. Then of course you have no choice but to increase the price. But we are back to the original question (although with some more insights) “By how much should I increase my price?”

A final answer to the impossible question

A good pricing strategy is never a simple solution. This is why you need proper research compiled, and frankly this is something you have to pay a professional to do. Something that is worth mentioning is that in these uncertain times you need a quick turn around. Don’t settle for anyone who wants to give you a pricing recommendation in 6 months time.. By then, it would be redundant.

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Atenga Insights is a fast-growing, global company that is challenging the pricing consulting industry. Using our unique proprietary PDA™ technology, we identify the price and positioning that will generate higher sales and profits for our clients.