Concerns about the impact of inflation are growing almost as fast as inflation itself. When the Conference Board surveyed close to 1,000 CEOs around the world in late 2021, some 82% said they are facing upward price pressure for inputs into their businesses. In the U.S., over half of the CEOs surveyed expected at least 18 more months of high inflation.
Then it got worse.
Jerome Powell, the chairman of the US Federal Reserve, said in a speech in March that the inflation situation had “deteriorated significantly” even before Russia invaded Ukraine, and that it may now take three years for inflation to return to a level of around 2%. His speech came shortly after gasoline prices spiked to a record high of $4.43 (nationwide average) on March 11. Then in mid-April, the announcement came that US consumer inflation hit an annualized rate of 8.5% in March, the highest level in over 40 years.
But we aren’t writing this article to help pricing managers and chief revenue officers (CROs) doom-scroll faster about this inflation tsunami. Our objective is to help them with the myriad challenges they face, which range far beyond the basic question of “how much should I raise my prices?”
Most companies have a large portfolio of products, selling through a variety of channels and facing different kinds of competition. These demand-side and competitive interactions are complex and require answers to a much more extensive range of questions than that basic “how much?” one. What does that mean for pricing decision-makers? As their top executives press them for solutions, they will not only need to come up with “how much?” answers, but also to understand their overall leeway for action, the direct and indirect risks of those actions, and the broader strategic opportunities that they could capitalize on.
Warren Buffett has called inflation a “gigantic tapeworm” that consumes resources unless a company has pricing power, which means it can raise prices with minimal loss in volume. How much pricing power do you have right now, and how is it developing? Meanwhile, a time of high inflation with no foreseeable end creates opportunities for companies to make bold strategic moves – a change in price models or a repositioning of the portfolio – instead of tactical responses. What changes – especially long overdue ones – can you implement right now by seizing the moment?
Here’s a spoiler alert. The story we’re writing in this paper will soon take surprising twist, one that may catch experienced pricing managers and CROs off guard. The methodology best suited to provide reliable, durable, and actionable insights for your immediate and longer-term price decisions is a supercharged 2022 version of a decades-old methodology: conjoint measurement.
Your bottleneck is customer information and intelligence
In today’s volatile environment of persistently high inflation, no teams can make wise decisions on price changes, pricing power assessments, or portfolio realignments without having the best possible basis of information they can get. Yet pricing decision-makers are quickly realizing that their old data sets and assumptions have lost a lot of their relevance, and the models they fueled have lost their potency. Fortunately, amidst all the volatility of the last two years, the gold-standard source for market information and intelligence to guide pricing decisions is the same one it has always been.
It’s your customers.
How much do you still know about your customers? What new stories and insights can they offer you? Back in the more stable days prior to the Covid pandemic, the needs of customers, their behaviors, and their perceptions usually changed incrementally. They rarely underwent a major step change. But the behavioral shifts of consumers during the pandemic – even before inflation struck – have been so profound that they have left a “new normal” or “new reality” in their wake. Staring at barren shelves and facing service limitations, consumers quickly became adept at finding alternative channels, alternative ways to meet their needs, and in some cases, an entirely different perception of value and their willingness to pay for it. These ongoing shifts make it urgent to understand what your customers are thinking: thoroughly, reliably, and in as close to real-time terms as possible.
That task is easier said than done. Getting actionable insights from customers has always presented multiple challenges, starting at the highest level with decisions on what questions to ask, what methodologies to use, and what reliability and insights you can expect from the answers. The shelf life of those answers is also important.
Here at EPIC Conjoint, our pricing research and advisory services solutions can answer complex pricing questions in a matter of days, not months. We give decision-makers the fresh, robust information basis they need, but without the cost that once made conjoint measurement a prohibitively expensive methodology for all but the most high-stakes decisions about blockbuster brands and products.
Of course, we know what will happen when you suggest conjoint measurement during your next Zoom call about inflation. Someone will say that sophisticated market research like conjoint is too slow in today’s times of rapid change and high uncertainty. Why invest so much effort into robust, high-quality answers that will probably be rendered obsolete by the time the work is completed?
Before we get into the details of how EPIC has supercharged conjoint for today’s challenges, we’ll let one of our clients answer that question.
When Heineken, one of the world’s largest brewers, needed a way to generate and apply fresh customer insights, it turned to EPIC. “A typical conjoint analysis project can often be expensive, time consuming and inflexible,” they said after our collaboration with them. “The tool developed by EPIC Conjoint combats these issues and much more. We have used the tool to develop new pack and pricing architecture on our key brands, that we believe give us a strong commercial advantage versus our competitors.”
Just as important to clients is our full-service support, from design to distribution. Shell Oil describes EPIC as “a true partner, not only during the conjoint survey design and analysis phases, but more importantly when it comes to translating results into the real financial impact to our bottom line.”
Now let’s get specific
If you made a “wish list” of what you would love to know – with a high level of confidence – before you recommended or signed off on price changes as a response to inflation, what would those questions be? We imagine that your initial wish list may include things like:
- What value-for-money trade-offs are my customers willing to make, both within my portfolio and within their set of alternatives?
- How do these trade-offs differ by segments?
- What price increases could they tolerate without buying less or going to the competition?
- How stable are the traditional price thresholds in our market? Have some been breached and have new ones emerged?
- What are the opportunities for targeted price increases, either by customer or by product?
- Which products in my portfolio are most and least vulnerable to rising input costs or to price changes my competitors might make?
When you step back from this list of questions, it should become clear that you need to model the market in order to understand how customers will respond to market actions, whether yours or your competitors’. Looking at any product in isolation is insufficient and could lead your decision-making astray.
The search for answers to those strategic questions on your “wish list” goes beyond the capabilities of classic research methodologies. Using historical data to feed models has its limitations because, strictly speaking, you can only reliably model what you have already observed. The further you move beyond observation, the greater the risk that your historical data does not capture what would really happen in that unchartered territory.
The best view into that unchartered territory comes directly from your customers. Tools such as Van Westendorp test a respondent’s price sensitivity, but may only provide useful insights into the most basic questions. This makes a case for more sophisticated research methodologies, but in their old-fashioned forms, they raise some concerns. Conjoint measurement, in particular had the reputation for being hard to prepare, expensive to conduct, and slow to yield insights, no matter how robust they may be. Teams might also see sophistication as overkill to answer a “how much” question for an inflation-related price increase.
It is tempting to boil inflation down to that basic question – “how much should I raise my prices?” – and then use some basic data from simpler methodologies to answer it. Theory says that with a solid estimate of your price elasticity and a good view of your variable costs, you can quickly come up with a “how much?” answer that will optimize whatever financial parameter you want to improve or protect: profit, margin, revenue, or volume.
But yielding to that temptation is dangerous. That simple math may work for a quiz in an Economics 101 class, but offers little help in the search for real-world answers in 2022. Few if any companies have one product with one price, nor should they limit themselves to blunt, one-size-fits-all price increases to their existing price metric.
What else might a “price increase” entail? A price increase could take many forms, depending on your objectives. The usual goal of a price increase in an inflationary period is to protect margins, or more precisely, to protect profit levels. Some price decisions could indeed rely on a classic exercise in price elasticity, where you want to determine how much volume you might lose if you raised prices by a certain percentage. But price increases could involve the introduction of new fee or surcharge, or a switch to a new price model. A company could also best meet its objectives by changing the portfolio or changing the channel strategy. It could bundle or unbundle products and services, or it could introduce a less expensive alternative (LEA) produced at a lower cost.
The introduction of an LEA gives you an additional offer to test, so that you can calibrate the price differential between your primary offer and the LEA. Then there is the question of cannibalization. Will the LEA draw its volume from competitor products or from your own product, and what consequences will that bring?
You see where we are going with this. Defaulting to basic research methods and basic math – in the interest of perceived cost and time savings – can easily lead a team to overlook better opportunities, underestimate risks and unintended consequences, and leave vital strategic questions unexplored.
Why shoulder the pressure of having to make high stake pricing decisions on your own. If the world’s most successful brands rely on EPIC Conjoint’s pricing solutions to help them make successful pricing decisions…..why shouldn’t you? Let’s Meet and explore how EPIC Conjoint can help. It costs nothing to ask!
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