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How businesses are pushing the pricing envelope

Harvard Business School has observed a significant shift in pricing strategies among businesses since the pandemic. This change, driven by disruptions to supply chains and evolving consumer behaviour, has led to more dynamic and experimental approaches to pricing.

Increased Pricing Frequency and Digital Adaptation

Traditionally, large companies implemented standard price increases annually. However, the pandemic’s economic impact has prompted these firms to raise prices more frequently. Retailers are increasingly utilizing digital price displays, allowing for rapid price adjustments at the touch of a button.

The Role of Supply Chain Disruptions

The pandemic-induced supply chain disruptions significantly impacted corporate costs, compelling companies to rethink their pricing strategies. According to HBS, this situation accelerated a trend towards more strategic pricing, demonstrating that companies could adjust prices more boldly without deterring consumers.

Profit Margin Dynamics

During the late 2020 and into 2021, companies in the S&P 500 index experienced soaring profit margins, partly due to government stimulus and Federal Reserve interventions boosting consumer demand. Simultaneously, these firms raised their prices substantially, covering the increased costs of energy, transportation, labour, and other inputs. Notably, corporations such as Apple, Williams-Sonoma, and Delta Air Lines reported record-high margins.

Maintaining High Profit Margins

As costs begin to decrease, companies are now strategizing on how to maintain or even expand their profit margins without passing these reductions onto consumers. This approach has kept average margins across various sectors in the S&P 500 near or above 10-year highs.

Shifting Focus from Market Share to Profit Margins

In contrast to post-2009 practices, many corporations are now prioritizing profit margins over market share growth. Companies like Sysco and Lennox exemplify this trend, focusing on profitable growth and margin-dollar optimization rather than revenue-driven expansion.

Consumer Price Sensitivity and Inflation

Despite some consumers becoming more price-sensitive due to high interest rates and dwindling savings, many companies are still contemplating further price increases. However, there are signs of increasing price elasticity, particularly in brands catering to lower-income consumers like Walmart and McDonald’s.

The Future of Pricing Strategies

As the economy continues to navigate post-pandemic challenges, the ability of companies to sustain high prices or continue raising them is uncertain. While some sectors have successfully passed price increases onto consumers without significant backlash, others are beginning to see resistance.