3 Lessons From Hyperinflationary Periods: Reduce Societal Fears

Table of Links

• Abstract

  1. Reduce the company’s costs of changing prices (“menu cost”)
  2. Reduce customers’ “stress of uncertainty”
  3. Reduce societal fears of “shrinkflation, greedflation, and doubtflation"

• References

3. Reduce societal fears of “shrinkflation, greedflation, and doubtflation"

Inflation is more than just a company or customer problem, it is a societal problem (Moss and Rotemberg, 1998). It affects the fabric of exchange, amplifying frustration with how the economy works. In particular, at times of high inflation customers become suspicious of “shrinkflation” – decreasing product sizes without customers' knowledge – and “greedflation” – companies taking advantage of information and customer exhaustion to increase profitability rather than sharing the burden with customers. Together, these fuel a sense of what we call “doubtflation” – a growing loss in consumer trust in firms and markets as their ability to use prices to make decisions becomes more difficult.

Amid high inflation the onus is on managers to step up to strengthen the credibility of their business decisions and trust with their stakeholders and communities. This involves sharing risks, focusing on relationships, and partnering with employees, supply chain partners, and customers. For example, in Venezuela, a successful retailer shared the burden of hyperinflation with employees by subsidizing prices for essential products, such as access to discounted food at their stores (Cavallo, Cal, and Larangeira (2020). This created substantial savings for employees given the high and rising retail food prices, while paid for at the level of wholesale prices by the company, making it more efficient for the company to deliver. The company also increased trust by communicating weekly with employees, providing information about the company's financial situation, strategy, and the inflation numbers they were using to set prices and wage adjustments.

As another example, one U.S. health care supplier, realizing that passing on pandemic and inflationary costs would be too much for their clinics and hospitals, completely revamped their pricing processes to limit price increases to their providers to allow them to be able to “provide health care.” They passed along as much of the cost change as they could when facing this constraint, and raised prices more in places where healthcare provision was not at risk to survive and navigate the extreme cost increase successfully together. Similarly, falafel vendors in Israel chose to not pass on all their current cost increases, taking a short-term loss in order to keep falafels priced as a street food rather than as a luxury. Not all firms can afford this strategy, but it can be a powerful long-term strategy that bolsters trust and cements future business.

Many companies (both B2B and CPG) have increased their partnership efforts with suppliers, customers, communities, and governments to work together to manage inflation. In Israel, to overcome runaway inflation, companies partnered with labor unions and the government to commit to a price and wage freeze for three months as a way to stop the inflationary spiral. This helped eliminate inflation in Israel within a few months.

By aligning the company’s pricing strategy around simplifying processes, customers’ evolving needs, and society’s risks, managers can survive and thrive in even the most difficult inflationary times.