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Pricing Amid Inflation: McKinsey Partner Offers Data-Led Best Practices

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Retail brands and consumers alike are feeling the pressure of inflation. But as we head into a new, elongated holiday shopping season, brands need to perfectly balance satisfying customer needs and maintaining margins.

In the first part of an exclusive four-part series developed in partnership with McKinsey, The Future of Retail Growth, we dig into the pressures impacting consumer behaviors and spending patterns. Emily Reasor, Senior Partner, McKinsey & Company, shares how retailers can better understand these consumer shifts and take a data-driven approach to pricing changes.

Retail TouchPoints (RTP): Inflation is obviously top-of-mind for retailers, especially heading into the holiday season. How should they be thinking about their pricing approach in these times? 

Emily Reasor: Unfortunately,  there is no one-size-fits-all solution. The reality is that businesses are caught between a rock and a hard place during periods of high inflation.

Repricing in an inflationary environment is necessary to sustain margins in a period of rising costs. But simply raising prices across the board can damage customer relationships, depress sales and hurt margins. It cannot be done blindly, so retailers should look at the opportunities in front of them to help customers address their own pain points.

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Companies should also move the conversation beyond pricing toward a broader discussion encompassing supply chain and inventory issues, credit challenges, labor shortages and more. Done the right way, recovering your cost of inflation can serve to enhance relationships and fuel performance.  

RTP: How loyal will consumers remain as prices continue to rise? What steps should retailers take to maintain customer loyalty? 

Reasor: Consumer loyalty and engagement should be top-of-mind for retailers, especially in this environment. We recently published two reports that dig into this topic.

Given the highest inflation rate in decades, it’s no surprise that our latest Consumer Pulse survey found consumers are worried, jittery and adjusting how they spend and save. But despite a general feeling of pessimism, there are some signals of hope in consumer behavior.

Our recent Winning in Loyalty report revealed that 31% of consumers are more willing to pay a higher price to stay with a particular brand. However, when faced with shortages, 50% of consumers said they would switch to another product, brand or retailer.

The reality is that not all consumers are willing to pay higher prices (or wait until products are back in stock) to stick with brands they know and love. Businesses should prepare for these changes and continue to keep an open line of communication with their customers. With prices on the rise, retailers should also look to set inflationary guardrails, which is essential. By building systems, processes and contractual provisions, costs can be recovered.

Transparency is another essential ingredient during volatile periods, especially because it helps sustain loyalty and engagement. For example, if you look at the grocery sector, it’s primarily a fight for loyalty rather than just one-off purchases. As a result, grocers have to consider the impact of pricing consistency and competitors on loyalty when shifting prices.

RTP: Should retailers engage with customers more regularly during this cycle as prices continue to rise?

Reasor: In short, most definitely! As I mentioned earlier, when this is done correctly, price adjustments can help businesses improve relationships with customers and protect margins. This requires both transparency and proactive communication.

Helping frontline salespeople move beyond pricing discussions with customers to deeper communication about shared business concerns can create alignment behind new opportunities. It also provides the chance for businesses to build the internal infrastructure and processes to make disciplined pricing decisions based on deeper customer insight. Lastly, it’s important to note that during this period, consumers are changing how they manage their finances.

Our Consumer Pulse survey showed that 66% of consumers are acting in response to rising inflation. Within this group, 44% are either dipping into their savings or reducing the amount they’re setting aside. Additionally, 18% of consumers are charging more to their credit cards, another 18% aren’t paying their bills in full and 13% are taking on extra work to earn more income.

Interestingly, while younger consumers are less concerned about inflation, they’re more active in managing their balance sheets. More than three-quarters of Gen Zers and millennials are making adjustments, as opposed to just two-thirds of Gen Xers and 55% of boomers. 

Against this backdrop, the bigger question really centers on how companies can maintain a proactive communications cycle and customer engagement mechanism. Companies can use data and analytics to monitor supply prices, competitor moves, increased stock levels and customer reactions.

This type of sales-led insight allows organizations to best adapt to rising costs and inflation, and the benefits are twofold. First, the right data and analytics infrastructure enables companies to quickly adapt to improve their revenues, margins and customer loyalty. Second, from a resilience planning perspective, leaders will be better prepared to respond more effectively to future shocks, inflationary or otherwise.

RTP: What pitfalls should retailers avoid when it comes to dynamic pricing?

Reasor: Many consumers will be price-sensitive, given the current price hikes. However, consumer tolerance of price increases will vary by retail sector as well as by individual items, such as staples versus impulse purchases.

Dynamic pricing requires a holistic approach, and we have four guiding principles for retailers:

  • Take a strategic view. Resist the urge to make sweeping cost-plus pricing action, and instead seize the opportunity to reset the margin architecture.
  • Think beyond the sticker. Price goes far beyond what the customer pays. Explore promotions, assortment, fees, service levels and operational interface with commercials to capture full pricing impact.
  • Stay agile. Use real-time data and make data-driven decisions with a robust war room and rapid change management.
  • Sustain impact. Intelligent pricing strategy requires ongoing management and governance. Establish key performance indicators (KPIs) to track impact and keep the team accountable to sustain long-term improvement. 

RTP: What retail trends do you see on the horizon as you look to 2023? 

Reasor: It is so hard to make predictions or even forecast trends in this ever-evolving environment! But as we look ahead, it will be interesting to see how consumers continue to change their shopping habits.

With prices rising so quickly and dramatically, people are changing the way they spend, which was reflected in our latest Consumer Pulse: 74% of our survey respondents said they’re trading down, with half of them saying their money doesn’t go as far as it did before. Some 43% are adjusting their spending to save more, and 29% say they can’t pay their bills.

It’s important for retailers to understand these shifts in behavior and adapt accordingly, taking into account the ways in which consumers are shopping, how they’re spending, and the categories they’re prioritizing over others.

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