Increasing raw material prices, a global pandemic, a war erupting in Ukraine, volatile economic conditions, demand shocks… The past few years have truly tested the resilience of organizations. Regardless of the effort that has been put into adapting businesses to continually changing external conditions, rampant inflation still greatly threatens organizations and their performance.
This is exactly where data science solutions for business prove to be a precious asset: By studying all angles of the marketing mix, they allow businesses to refine and identify different possibilities and make for quicker tactical and strategic decisions.
The impact of inflation is twofold: it affects both consumers’ purchasing behaviors and brands’ marketing strategies.
Products like sunflower oil, eggs and pasta are showing spectacular price increases in Europe and the US, which causes a drastic decrease in purchasing power. Consumers are forced to make trade-offs and remove certain items from their baskets. They also turn into price specialists, which is to say that they are more price-conscious than ever. Sometimes consumers might delay low-priority purchases to reduce total consumption or change where they shop to find the best value for money.
Inflation only offers one scenario to organizations: that of “losing the least” instead of “gaining the most”. Brands and consumers need to find a middle ground through a “consensual price” which not only compensates brands for their higher costs and lower volumes but also convinces consumers that they are spending their money on the best product value. It helps organizations preserve margins in the short term while securing long-term price positioning.
Why are pricing and promotion strategies important to organizations?
Price is one of the most important elements in the marketing mix, and so is promotion. Research found that the impact of a price variation can be 3 or 4 times higher than an increase in sales of an equivalent percentage at a constant price. When facing possible sales volume decrease, price and promotion are a strong lever for brands to compensate for losses. In addition to performance in general, price is also a major differentiator for brand image and customer engagement and makes for a distinction between an entry-level brand and a premium, or even a high-end one.
What needs to be kept in mind is that there is no single optimal response to inflation across industries since differences exist in business fields, brand strategies, product lines or customer price sensitivity. Marketers need to take plenty of data and factors into account to avoid simply acting on a hunch when deciding on their pricing strategy and measuring marketing effectiveness.
As a result, finding the most suitable price point is a shared challenge for both big and small brands as well as niche and mainstream industries, especially during inflation times. To make the best choices and study all the options available, data science offers a powerful toolbox to measure all these levers comprehensively across your product line to assess the ROI and the contribution of promotional actions. In addition, it does all this with greater granularity.
When inflation hits – and lasts – you may make decisions in the heat of the moment that could have a longer-term impact not only on your business, but also on your business model. Can your organization endure soaring costs by keeping their prices as they are? Or would you rather preserve your performance by raising prices and face a possible loss in market share?
In your product portfolio, there are products being more resilient to price changes in the short-term than the others, especially if your product has double-digit margins. Data science methods like Marketing Mix Modeling helps organizations fully evaluate product portfolios and competitive positioning. It also allows organizations to measure price sensitivity by product and stimulate the impact of price changes in various scenarios. Thanks to data science, organizations can determine the potential impact of a decision on a given activity.
Generally, businesses’ immediate reaction to inflation is to offer attractive discounts in order to increase sales volume. Even in ordinary times, promotions are often companies’ preferred tool to recover from losses in volume and market share. Yet the catch is that this is only a short-term solution.
Inflation magnifies the potential negative aspects of promotions, including:
Could the short-term gains generated by promotion become long-term challenges to the brand?
To make the most efficient trade-offs on this highly strategic issue and sort out what works and what doesn’t, your organization needs to make sure that the big picture is adequately described. Data science approaches support decision-making by providing a holistic view and allowing you to navigate with certainty – evaluating all the risks and opportunities by category, brand and product – even in the most uncertain business context.
Are your pricing and promotion strategies guaranteeing the performance of your organization during times of inflation? What kind of risks might your promotion plans pose in the short and long term regarding the competitive positioning of your product portfolio? Does your organization adopt data science approaches to determine its global pricing strategy?
Instead of finding the perfect pricing, businesses should focus on the idea of the “right price” in a given economic situation, brand strategy and market expectations. To navigate such a volatile market, one needs to picture various scenarios and anticipate possible outcomes. Measuring marketing effectiveness using very concrete analytical approaches would allow you to navigate inflation with more serenity. By looking back at the major disruptions and changes inflation is causing, we can easily see how and why pricing and promotion tactics can make a difference for your organization.
Learn more about how to use data science to steer informed and fine-tuned price-promotion strategies
According to the Harvard Business Review, 1% increase in price generally sees 7-11% increase in profit (Marn & Rosiello, Harvard Business Review 1992)