Optimize Prices in Line with Inflation

Hermann Simon and Adam Echter
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Hermann Simon: Simon-Kucher & Partners
Adam Echter: Simon-Kucher & Partners

Chapter 5 in Beating Inflation, 2023, pp 37-45 from Springer

Abstract: Abstract Under inflationary conditions profit optimization is mandatory. The optimal price depends on value-to-customer, costs, and competitive prices. These three determinants apply in times of inflation just as they do in normal situations. Value-to-customer determines the willingness-to-pay and thus the upper price limit (maximum price), costs determine the lower price limit, and the competitive price determines the price latitude. All three profit determinants are affected by inflation. So one must know how they change. Two of them, sales volume and cost, are negatively affected. Price is the only profit driver which can counter these negative profit effects. A full passing-on of costs to customers is generally not optimal. Rather, it is advisable to split the cost increase between the seller and the buyer. Only if willingness-to-pay rises sharply will it be possible to defend real profit or even increase profit. In addition to cost-cutting measures, efforts should be made to strengthen value-to-customer and pricing power with the aim of increasing willingness-to-pay.

Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-031-20093-9_5

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DOI: 10.1007/978-3-031-20093-9_5

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