How to Set Prices when Inflation is High
Because of various economic pressures, including the price of oil impacting the cost of transportation, companies of all sizes have had to increase their prices to stay in business. These combined pressures have caused a dramatic rise in inflation to 54.1% as of December 2022. According to Reuters, this is the highest inflation rate seen in 22 years.
As we highlighted in this blog post, Cost-Plus pricing and Market-Oriented pricing are two of the most common pricing strategies employed in Ghana. In this economic climate, you may have to further refine your approach to pricing decisions for your business. Let’s discuss some factors to keep in mind.
Competitors
Since you and your close competitors are likely experiencing largely the same economic changes, your positioning in relation to one another will probably not change. However, it would be wise to continue watching out for significant price increases or discounts they may offer, as that could either improve or impair your competitiveness.
Customers
While you need to cover your costs, how much of a markup you are able to charge depends on both the profit you want and how willing and able your customers are to buy your goods or services.
If your business offers nonessentials, such as in the beauty or luxury industries, you may need to be moderate in your price increases. Demand for your products is likely elastic, meaning that at too high a price, your customers might opt for a cheaper substitute, or go without entirely. As such, if you can afford to lower your markup, and thus increase your prices less dramatically, that may be wise.
You could even consider using a loss-leader strategy to draw in new customers. A loss-leader strategy is one in which you sell a product for less than retail price, perhaps at cost price, in order to attract customers to whom you can sell additional products or services.
Whatever price strategies you choose, you should supplement them with an effective marketing strategy and continued excellent service.
On the other hand, if the goods or services you offer are essential, like staple foods or medically necessary physiotherapy, demand is quite inelastic, and people cannot easily go without them. You have the ability to raise your prices and maintain your previous margins.
That said, it may be beneficial to make a small decrease in margins, even as you raise prices to keep up with costs. This keeps your product or service from being overly burdensome to customers, and may enhance customer loyalty as well as attract new buyers.
Beyond the headlines, paying close attention to your competitors, your customers and the impacts of inflation on your own supply chain are imperative to making the right choices for your pricing and your business.
