Inflation: Deal With It

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By: Arianne Cohen

The message has been lurking in the headlines for two years: Be afraid, be very afraid. Inflation, experts warned, could be the worst in a century! A disruption to the supply chain! A catastrophe to earnings! So how have companies responded to it?

Not nearly as extensively as analysts had hoped. By the fall, inflation had topped 8 percent and was still rising, its highest level in four decades. Yet even with so much time to prepare, many organizations simply raised prices by more than 8 percent—thereby fueling even more inflation. Call it Inflation Flight. In many cases, leadership simply had no experience with this economic evil. The average age of a CEO is 57, which puts today’s leaders in late puberty during the last bout of comparable inflation. Lack of experience dings self-assurance. “They don’t have a playbook, nor the certainty of ‘let’s give this a go,’” says organizational psychologist Cathleen Swody, a partner at Thrive Leadership. “They don’t have the confidence.”

Experienced or not, corporate leaders normally move faster against  a major financial crisis, but experts point to context. Operationally speaking, inflation began climbing just as companies were catching up from COVID supply-and-demand disruptions, as well as a labor shortage, says supply chain expert Melissa Hadhazy, a senior client partner at Korn Ferry. “Supply chains were already on their heels,” she says. Firms were also facing mass resignations, staffing difficulties, supply-chain implosions and employees at home in pajamas, forcing leaders to pull the obvious levers on inflation and keep chugging. “Leaders were too exhausted to confront another crisis,” says Swody.

There are still many more levers companies can pull in 2023. Oded Koenigsberg, a professor of marketing at London Business School suggests altering pricing models, adjusting product portfolios, and repositioning brands, to name just three. Are companies doing these things? “Let me be honest,” he chuckles. “Most companies have not yet used any of these strategies.” He emphasizes that inflation should not be considered a crisis, because it presents enormous opportunities. Under normal financial circumstances, a company can’t up prices by 10 percent to 25 percent without risking customers jumping ship. But amid inflation, a company can pair raising prices with messaging on why the pricing represents excellence—and successfully reposition a brand as higher quality. There is also an opportunity to shake out other inefficiencies that hide in plain sight when inflation and interest rates are low, such as product lines that don’t quite fit consumer demand, or services that bloat supply chains. “Inflation provides an opportunity to close all these gaps,” Koenigsberg says.

With many firms having already gone through multiple rounds of price increases this year, Koenigsberg suggests moving toward more complex pricing systems. Most companies offer a service or product for one set figure. Yet consumers typically range from power users to light users. Why, he asks, are both heavy and light users paying the same amount? Now, he suggests, is the moment to price so that consumers pay according to how much they use. This would relieve one misery Koenigsberg sees: “Inflation is an opportunity dressed as a threat.”