Inflation has dominated the business and financial headlines since early 2022, as consumers and businesses have coped with the uncertainty of high prices and high interest rates. We spoke with BCG’s Jean-Manuel Izaret, coauthor of the recently published book Game Changer: How Strategic Pricing Shapes Businesses, Markets, and Society, about how companies should approach pricing in a period of persistent inflation.
BCG: Annualized inflation rates have declined in many countries since peaking in 2022, but they remain higher than recent historical averages. How are these trends impacting how companies set their prices?
Jean-Manuel Izaret: There is no blanket answer. One reason is that inflation rates show a lot of variation when you look beyond the headline numbers, which are overall averages. Consumer prices in the US rose by 3.7% in the year through August, for example, but prices for transportation services rose 10.3% in that period and prices for used cars and trucks fell by 6.6%. The challenge for business leaders is to understand inflation in their own market, and more importantly, its strongest drivers.
What could those drivers be?
You’ll hear many explanations for inflation, and each has a kernel of truth. The macroeconomic answer is that inflation results from increases in the money supply. But the practical day-to-day answers include higher demand, acute supply shocks, or greater pricing power due to higher market concentration. Others argue that “it’s the market being the market” and that inflation is just the aggregate result of how individual companies respond to supply and demand signals. The best answer is actually all of the above, but the impact of each driver varies by market.
With all that variation, how can you give business leaders precise guidance on managing inflation?
The recommended guidance is less about managing inflation and more about how companies set their prices to begin with. To understand that, we need to look beyond the numbers once again and delve into their pricing strategies.
My colleagues and I have developed the Strategic Pricing Hexagon, which defines seven distinct pricing games. When we looked at the effects of inflation in each game, we noticed that a company’s actions have more to do with the nature of their game—their market characteristics, their position, and the degrees of freedom they have in their pricing—and less with the level of inflation per se.
Could you give some examples?
Players of the games on the right side of the Hexagon—the Value Game and the Choice Game—have better chances of improving margins and making price increases stick. Value Game players have strong brands and highly differentiated value propositions, which means they can keep prices firm despite downward inflation trends and weaker demand. Higher input costs matter less to them than players of any other game.
Choice Game players, meanwhile, adjust their product portfolios in ways that help customers continue to self-select affordable options. In some cases, Choice Game players introduce higher-end options, and in other cases they raise prices in different ways across the portfolio. But in every case, customers have the choice to select the best option for them without having to switch to a competitor.
What about the other areas of the Hexagon?
Costs matter most in the Cost Game and Power Game, the two games on the left side of the Hexagon. But even there, some factors tend to keep inflation moderate. Cost Game players often have long-term contracts which postpone or lessen the effect of price changes. In the Power Game, the balance of power is paramount, and this helps keep price increases in check. The greatest risks in the Power Game are supply disruptions, which can lead to significant shifts in market share from one supplier to another.
For players of the Uniform Game, at the top of the Hexagon, profits reflect a delicate balance between costs and customer value. Elevated commodity, supply chain, and labor costs have kept their margins under pressure and forced them to become more creative in the use of pack sizes, prices, and targeted promotions.
In the Custom Game, discipline and consistency are essential, because customers are becoming more informed and demanding. In the Dynamic Game, we can only begin to imagine how artificial intelligence will create opportunities for personalized offers and prices.
How can companies best prepare themselves for future waves of inflation?
That starts with their pricing strategy, which expresses how a company wants to grow its market, influence how money in the market flows, and to whom. Leaders need to ask themselves three questions:
Each game has its own set of tools, rules, forces, and structures. Companies succeed in their chosen game by following best practices and building the capabilities to sense shifts in their markets. The recent wave of inflation has shown companies how critical such pricing capabilities are. Elevating those capabilities to be best in class—and mastering their company’s game—will be productive regardless of the level of inflation.
Business leaders have long wanted to make pricing simpler, more rewarding, and less frustrating. BCG’s Strategic Pricing Hexagon consolidates disparate pricing ideas into one master structure.
The longer the threats of inflation, recession, and disruption persist, the more B2B companies will need to use a wider range of pricing options to maintain strong financial performance.
Charging different prices is often fairer than charging everyone the same price. Companies should take steps to educate customers and win their support for this approach.
Overwhelming consumers with elaborate promotions, discounts, coupons, and loyalty rewards can weaken consumer loyalty, tarnish brand reputation, and suppress new revenue opportunities. Instead, retailers should adopt a streamlined, customer-centric approach.
