Managing Partner, Chicago, Sector Lead, Travel, Hospitality & Leisure Practice
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Skip to main contentThe firm’s leadership had gathered to decide about raising prices for its clothing lines. The company had already increased prices twice this year, yet costs were still rising even faster. A third increase was decided upon, but a worry lingered among the leaders: Had they gone too far?
Welcome to the pricing puzzle of 2022. With inflation rising at a four-decade-high pace, a wide range of firms are struggling to figure out what consumers and B2B partners can stomach before they entirely drop their loyalty to a brand or a service. Historically, passing this tipping point has resulted in damage that can be longstanding if not permanent.
For many consumers these price hikes seemingly came out of nowhere, and most economists are bracing for even greater inflation, in part because of the economic fallout from the Ukraine war. “Companies are very worried about how they’re going to weather the storm,” says Radhika Papandreou, sector leader for Korn Ferry's Travel, Hospitality & Leisure. “This could affect some businesses as much as the pandemic.”
To be sure, some lower-tier companies, like private-label manufacturers, can do well in downturns, since their products are generally priced lower than their brand-name competition. Distributors and middlemen are also positioned for potential profit. (If the price of a widget jumps 15%, distributors earn more per item.) But price jumps can be very risky for retailers, leading people to stop buying and then forcing major markdowns to sell inventory. “The price increase winds up costing you money,” says retail expert Craig Rowley, senior client partner at Korn Ferry.
Many retailers change prices less often than you would expect. They set pricing for the whole season, including sale events, and then monitor competitor pricing online and in stores. They change prices to remain competitive. Retailers only alter prices "when they have to," says Rowley, which is typically once a month or season, and for most products, "not at all." This is very different from the dynamic pricing algorithms used by airlines, which shift ticket prices based on demand, available seats, and timing. Algorithms differ, but many ticket prices change about once per day, though some change more or less frequently.
Rowley says that pricing is best assessed on a product-by-product basis, because some items and services are much more price sensitive than others. For example, people will buy shoelaces whether they cost $1, $2, or $4. This consumer habit holds particularly true with products that people don’t purchase often enough to know the price offhand. As they set price points, “retailers are focusing on those,” Rowley says.
Still, some consumers may soon stop spending altogether. “We’re close to the tipping point where people ratchet back what they buy,” says Rowley. This is frustrating for retailers, because it means that consumers will stop buying flip-flops because of the prices of gas and milk. But he says that retailers do have some control over the other reason people stop buying: sticker shock. “The customer will say, ‘You know, I don’t like steak that much.’”
In travel and leisure, companies that are dependent on customers’ disposable income are treading very carefully, says Papandreou, because they risk losing customers altogether. In this industry, it’s a service-by-service calculus: an airline will lose one customer altogether, while a local big-box store might see customers simply spending the same amount as they did last year while buying less. High-end travel-and-leisure companies have more leeway, Papandreou says, because people in the top income quartile can absorb the costs. “There’s more elasticity in the luxury side of the business,” she says.
The market to worry least about is B2B. “They kind of just understand—there’s more tolerance,” says Mark Grimshaw, senior client partner in the Global Sales and Service practice at Korn Ferry. Fewer companies are at risk of losing clients, because often these clients are already invested in their providers’ services or technologies. For them, weathering a 15% price increase is more sensible than switching. But alarms bells can go off if prices jump around 20%, at which point a client company might run a three-year projection and consider switching. Expected increases are tiptoeing toward that tipping point. “The companies that I speak to are seeing, expecting, and absorbing 10% to 18% price increases,” says Grimshaw.
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