Simplifying Decision Making in an Inflationary Environment
- With inflation hitting new highs in the UK, Eurozone and the US, retailers and suppliers are having to deal with unfamiliar pressures with little, or no, first-hand experience. The same is true of consumers.
- At Prisma we have over 5 years of experience working in high-inflation environments with clients across Latin America, and have first-hand insights in how to mitigate pressures on margins and maximise sales.
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What have we learnt:
- Inflation significantly changes patterns of consumption.
- Inflation has both a macro economic effect and micro effect at the product level. These are not the same, and inflation needs to be considered differently at different levels of granularity.
- Factors such as price elasticities change but not necessarily in proportion to changes in consumption or uniformly.
- Consumer behaviour may change, bringing in new clients and buying habits, but it can be predicted.
- Good forecasting is crucial to successful decision making.
- Strategic inputs should be revised to ensure systems are aligned to the new environment.
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Where traditional tools and processes can break down
- Poor decision making will result from modelling that fails to incorporate inflation properly, or relies too heavily on single variables that do not behave “as normal”. For example:
- Not incorporating inflation properly into forecasting.
- Not applying deflectors to the variables that feed modelling.
- Applying a one size fits all approach rather than looking at the differing effects at a more granular level.
- Assuming that variables such as elasticities will behave as normal.
- Normal customer price perception breaks down (see below).
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How Prisma can help with inflation and offer competitive advantage
- Our data science team has a wealth of experience guiding clients within an inflationary environment and uses that knowledge to build inflation into your forecasts.
- We use inflation deflectors within our modelling that are applied to individual variables to recommend decisions.
- We focus at the product level, calculating variables for individual items, rather than at a macro level.
- Our business rules can be quickly adapted to provide a unified approach to pricing, assortment and promotions and avoid conflicting decision making.
- Conclusion
- An observation on Price Perception
- In high inflationary contexts, customers' price perceptions become less accurate, as the customer is required to update the perceived price in their mind more frequently. In a survey that we carried out for a client in a chain of Convenience Stores, we saw how the price perception of certain products was high. We also asked which was the reference store for comparison; when we visited those stores, we observed that the perception was wrong.
- 1. Segment Known Value Items and work with competitive positioning by Trade Area.
- 2. Establish relationship rules between the KVIs and the rest of the products.
- 3. Increase the frequency of KVI surveys.
- 4. Combine with margin guidelines as cost increases may precede price updates in the Trade Area.
- 5. All these actions can be configured in your software to achieve greater automation in the price change process, considering the variables mentioned in inflationary contexts, thus improving the profitability of the stores and the perception of prices.
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