- In 2022, inflation is being driven by a complex mix of pandemic aftereffects, changing labor markets, supply chain shocks, and geopolitical concerns.
- Innovative companies are using inflation as an opportunity to reexamine assumptions and make needed changes.
- Smart innovation can support your clients while maintaining business continuity.
Inflation is a chance for innovative companies to revisit their assumptions, make needed changes in pricing, and introduce new ideas and approaches. An innovation strategy is key to keeping prices reasonable while supporting your customer base.
How Is Inflation Defined?
When we talk about inflation, we’re referring to the Consumer Price Index (CPI). The CPI is the price of a set of goods and services (approximately 80,000) added together and compared over time, determined with a survey regularly administered by the Bureau of Labor Statistics. Each is weighted by how many in the survey use it. For example, as cable subscriptions have dropped, and streaming services have become more popular, the latter have gradually gained more weight in the CPI calculations.
This is an imperfect measure. For example, vegetarians haven’t experienced nearly as much inflation as omnivores. On the digital side, digital goods don’t need to be shipped, so are less sensitive to fuel prices. So in these cases, you should treat rising inflation as an overall upward trend. Some industries are more exposed than others, but everyone will feel it to some degree.
What’s Driving Inflation In 2022?
Inflation is never spontaneous. The current price rises are driven by fundamental factors businesses need to understand.
Global Pandemic Impacts
Many companies have global supply chains to take advantage of access to raw materials, lower labor costs, and other factors. However, uneven vaccination rates and rolling safety measures have rippled through supply chains, raising costs of everything.
Sudden Labor Market Changes
The pandemic has hit the labor market in ways that are still being sorted out. It sped up retirements, struck workers in some industries and sectors harder than others, and forced millions out of the workforce due to chronic illness or caregiving responsibilities. This has rapidly driven up wages, as employers now find themselves in a tight labor market, especially in the service sector.
During the COVID-19 pandemic, demand for services like travel and dining out evaporated, driving much of that demand into goods. As services have returned, that’s added more volatility to the overall market, with stores overstocked even as service jobs go unfilled.
Federal Funds Rate Increases
The Federal Reserve has two mandates: to keep inflation low and employment high. Its primary tool is the federal funds rate, which is essentially the underlying cost to borrow money. As the Fed hikes rates, this should cool overheated markets.
This has collateral effects, however. Between 2008 and 2015, the rate was effectively nothing, and the Fed had been gently easing the rate upwards and then down in the five years before the pandemic, which forced it back to zero. Now, inflation is mandating rapid rate hikes which could dry up demand.
Another problem has been major geopolitical events, like the invasion of Ukraine by Russia. This has had enormous impacts on fuel and food prices as sanctions have been imposed, imports and exports have been cut off, and investors have moved their money away from risky markets.
How Organizations Use Innovation to Fight Inflation
With inflation, you first need to know the scale of the problem.
- Determine where rising prices are affecting your bottom line. Just like each household is different, each business is different.
- See where the impact is starting to be felt inside and outside. Are you seeing sales drop on cheaper products? Are you seeing more interest in different price models? Have budgets risen for needed materials and consumables?
- Listen to your clients. What are they asking for? Have their needs shifted? Have they brought up the cost?
- Look at your previous assumptions when pricing and selling. Do they still hold true? If you were using one material because it was cheaper, but an alternative is the same price, would it make sense to switch?
Once you have a sense of the overall trend and possible effects, you have some options:
- Change the range of products you sell by bundling or unbundling products, streamlining your product line, or launching new products.
- Raise or lower prices depending on the relative value your customers get from your products and margins.
- Change how you charge for your products. Customers may be more interested in subscription models as opposed to flat fees or paying upfront on a yearly basis for subscriptions to lock in prices.
All these scenarios have different opportunities for innovation. Prior to the pandemic, insurance companies offered pricing models where in exchange for installing a device in your car that tracks your behavior, your premiums were raised or lowered depending on how safely you drove.
This model has exploded during this period of inflation as it serves two needs: customers reduce their premiums through direct actions, saving on fixed costs, while insurance companies are less likely to be required to pay out. This is important as crashes and injuries have risen.
In other cases, it’s involved embracing technology already in use. While business travel has returned to some degree, many companies are turning to the videoconferencing tools they already use to cut out unnecessary trips while still getting face-to-face meetings. Others are moving up major changes, such as adding renewable power to their facilities to stabilize long-term costs and to lock in prices before they rise further.
When prices must go up, many companies use their marketing tools as educational tools, clearly signposting the increases and laying out precisely what’s increasing costs to customers. Others are involving their customers in the conversations, asking them what pricing models they want to see and what needs can be met.
Inflation is a thorny problem, and it’s unlikely it will fade quickly. A careful innovation strategy that taps into the creativity of your team and your clients can help. To learn how, request a demo!