TAMING THE DRAGON: THREE STEPS TO STRATEGICALLY TACKLE INFLATION

By SKIM

In past decades, high inflation rates mostly only challenged small, troubled economies like Argentina, Venezuela, or Turkey. But with CPI reports now topping 5–6% in historically low-inflation markets like Singapore and Indonesia, and 10% on average for the 38 countries in the OECD, inflation now touches us all. And it isn’t going away any time soon. 

As vulnerable consumer segments reach the limits of their wallets, and more affluent consumers start to feel the squeeze as well, your company is likely struggling to maintain margins and please shareholders.

So what can you do about this? In this article, you’ll learn a three-step process to mitigate the effects of inflation on your business. We share proven strategies that our clients have adopted to successfully tackle inflation.

Putting the consumer at the centre

First, we advise taking a step back and looking carefully at what is at the heart of any successful strategy: the consumer. Do you understand how they behave and decide well enough to inform your strategic response to dealing with inflation?

A strong product portfolio serves the needs of different market segments and capitalises on different levels of willingness to pay among different groups of people. Some products might be able to carry a bigger price increase than others; others might be able to capture lost share for consumers trading down within your category due to rising costs.

Does this apply to your portfolio? Are some consumers being priced out? Or are you leaving money on the table for some in order to find an acceptable price for everyone?

Strong inflation has the tendency to disrupt categories, with consumers often no longer following their habitual shopping journeys. Instead, they are forced to make more deliberate trade-offs and revisit product and brand choices that used to be automatic decisions. It is in understanding these decisions that we can find the first clues in how to adjust your pricing and portfolio strategies.

Consumer behaviour questions you need to answer for sound inflation strategies

For each of the consumer segments you serve, you need to understand how they are affected by inflation. How severe is the disruption to their behaviour and in what ways are they changing their behaviour? This bigger question of how your customers are re-evaluating their choices can be broken down into a set of smaller questions:

• Are they running into price points they can’t afford any more?

• Are they looking for different products or service characteristics?

• Are they skipping, changing, or reducing usage occasions?

• Are they becoming more promotion-driven in their choices?

• Are they downtrading to cheaper brands in the same category?

• Are they switching to more affordable substitutes in neighbouring categories?

• Are they using more affordable channels for their purchases?

Once we have answers to all these questions and more, we can start plotting the tactical and strategic responses.

• At a tactical level, prices and sizes can be adjusted in varying degrees for different brands that serve distinct consumer segments, each with their own willingness to pay. You may be able to perform gradual small price increases or size decreases to reduce disruption in the category and keep consumers in their habitual loops as much as possible.

• On the other hand, once consumer behaviour is disrupted, more fundamental changes to your portfolio are needed to address consumers’ deliberate trade-offs in this new situation. This means taking a more strategic look at your portfolio. For example, new pack sizes could be introduced to better serve new usage occasions or facilitate the need for more value-driven pack buying. Existing brands could be repositioned, or new brands introduced to serve as a safety net for the most price-sensitive consumer segment. Channel priorities might shift from convenience stores to supermarkets or discount stores. Effort could be put into developing more durable products that alleviate pressure for many, etc.

How to manage your portfolio successfully to mitigate the effects of inflation

When considering a more strategic response to inflation, we advise clients to follow a three-step process that combines data analytics, forward-looking experimental research, and a holistic approach to stakeholder alignment.

1. Analyse existing data and information to set pricing and portfolio direction

In today’s digital world, a vast amount of historical data is available to help us navigate rough waters. On the one hand, we have sales data from digital shopping environments and aggregated sales data from physical stores from suppliers like Nielsen, IRI, and NPD. On the other hand, we have economic data on rising income gaps, product prices, wallet sizes, and saving levels. And, of course, your brand will have a broad range of other relevant information sources (e.g., social listening, customer service, previous research, etc) to help you understand the consumer. These sources create a strong foundation to observe people’s actual behaviour and form hypotheses around where certain solutions to dealing with inflationary pressures may lie.

However, these sources also have limitations. Although historical pricing and sales data can be used to assess price sensitivity and predict share changes for future price changes, these predictions get less accurate for higher prices beyond those observed in past data. But these higher prices may be exactly what your company needs to consider in today’s environment.

Similarly, based on existing data and insights, you may expect there to be a larger market for a smaller, more affordable pack size. However, that same historical data will not be able to tell you how successful such a new product might be, or how much it would cannibalise from your existing portfolio.

We basically don’t understand how consumers will respond to intended changes in pricing and portfolio strategies unless we can explicitly test these hypothetical scenarios. These applications are where experimental research like conjoint analysis shines.

2. Use forward-looking experimental research to test strategies

The main advantage of forward-looking research approaches, like conjoint analysis, over historical data is that brands can evaluate new prices, sizes, variants, and other product features that don’t exist in market. We can test those items for which we don’t yet have any available data. In a highly inflationary environment, this becomes increasingly important as the probability that prices will be pushed outside historical ranges is extremely high. Additionally, more strategic responses to changing consumer preferences often require the introduction of new products, the repositioning of existing ones, or other alterations to your current product offerings for which no historical data are available.

In conjoint research, people trade off the options available to them and select the one they are most likely to buy. Based on the information collected, a market simulation model is built that calculates the impact of different pricing, sizing, and portfolio strategies on shares, revenues, and profit at a product, brand, and portfolio level.

Through the conjoint market simulation models, brands can simulate a virtually infinite number of ‘what-if’ scenarios and make data-driven decisions on how to best adjust their pricing and portfolio strategies to cope with inflationary pressure.

While conjoint research will provide detailed information available down to the exact impact at an SKU level, keep in mind that the key to a successful strategy is to look at the portfolio’s impact. What is good for one product or brand might have a negative effect on another, reducing the overall effectiveness of the move. That’s why optimisations are always run at a portfolio level, to ensure that the recommended strategy maximises returns for the company overall.

3. Bring all key stakeholders together for alignment and activation

As you have most likely experienced, pricing strategies can rarely be set by one person or team alone. Often many functions are involved – from supply chain to sales, marketing to finance. Therefore, we recommend bringing all stakeholders together for each pricing initiative as early as possible to align possible strategies for different brands and market segments. It takes a multi-disciplinary team to assess which solutions are feasible both for the business and for partners such as retailers.

An effective way to achieve this alignment is by using a business wargaming session. Different teams impersonate different brands in the market and try out ‘what-if’ scenarios in a competitive environment of actions and reactions, playing out a variety of potential strategies and responses. During this interactive process, participants understand the impact on the business measured through a market simulation model.

In addition, in these types of workshops, considerations from a variety of fields, like brand management, operations, sales, and finance, are actively brought in. This gives more context to how different players are expected to act, why they might act a certain way, and what strategies are feasible for the brand. With the different stakeholders on board, and all the considerations and limitations considered, only pricing and portfolio strategies that can be realistically executed are formed.

Conclusion

Inflation is here, it is staying around for a while, and it might even become an integral part of our lives for the foreseeable future. This poses challenges to consumers and brands alike. From a brand’s point of view, placing the consumer at the heart of your efforts to manage inflation is key, and requires the following:

1. Analyze existing data and information to set direction. Do we truly understand what drives consumers? What trade-offs do they make? When do their habitual patterns get disrupted?

2. Use forward-looking experimental research to test strategies. For instance, leveraging conjoint-based market simulator models to make data-driven decisions that have a higher probability of success. Go beyond tactical price changes and work towards more effective and sustainable pricing and portfolio strategies.

3. Finally, bring all key stakeholders together. The more strategic pricing decisions of today require a multi-disciplinary team to assess what is feasible, and what is optimal, and to create buy-in on pricing strategies early on.

Following these steps, strategies that revolve around a deep understanding of the customer and that can be realistically implemented by the business and by partners such as the retailer will be most successful in driving value even in today’s challenging inflationary landscape.

This article was first published in the Q4 2022 edition of Asia Research Media

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