Fraser Smeaton, CEO at Morph Costumes, is in a pickle. With inflation easing and a cost-plus model in play, he’s facing a tricky balancing act.

He’s not on his own as business leaders across Britain are tackling a pricing challenge, deciding between cutting prices to win customers or fattening their profit margins.

“Our prices have got to go up as our input costs rise which makes everything more expensive,” says Smeaton, “but if we see costs reduce in time, we’ll be in a position to reduce our prices again.”

Detailing the £40m retail apparel and internet clothing company’s pricing strategy, he says that as Morph Costumes prices have increased, they’ve had to go through the business to see where they can cut costs, looking at optimising packaging, ensuring they’re not tripping any thresholds where they’d pay more for delivery and examining raw material sourcing.

Looking at the bright side, Smeaton acknowledges that “these are all useful exercises to carry out for the long term.”

Impact of inflation 

Although the December 2023 inflation rise to 4% is expected to be a temporary blip rather than a lasting trend, prices continue to rise, albeit at a slower rate compared to the spikes seen in the last 18 months. 

Global inflation, hitting record highs in the last two years, is still expected to slow. Despite the marginal increase in the UK’s rate, the Bank of England forecasts a decline to 2% in 2024, indicating the current percentage is still twice the target level.  

Comparatively, Eurozone inflation rose to 2.9% in December, supporting the International Monetary Fund’s earlier prediction that the UK would experience the highest rates among G7 economies in 2023 and 2024. Furthermore, the US saw an increase of 3.4%.

A recent study by the EY Item Club hints at a potential positive turnaround, anticipating growth in the latter part of 2024, citing predictions of decreasing inflation, possible interest rate cuts, and tax reductions.

What companies are prioritising

Across sectors, inflation isn’t a ‘one-size-fits-all’ conundrum. In manufacturing, components are bought and paid for months ahead so changes to inflation will have minimal impact on pricing strategies in the short term.

Peter Atmore, a non-executive board member at Made in Britain says inflation “is not the driving factor” in pricing strategies, emphasising the need for a “measured and holistic” approach to pricing decisions.

Robert Scott, a cleaning manufacturer with a turnover of 50 million and 230 staff, aims to absorb price increases as much as possible. Alastair Scott, the company’s sales director says while margins are being squeezed, Robert Scott plans to absorb price increases as much as possible to reduce the impact on customers, certainly in the short term.   

He adds, “Despite the continuing challenge of rising costs, we remain hopeful for economic recovery.”  

For the online retail powerhouse Freemans, with a turnover of £168.5m, value is placed at the centre. Richard Cristofoli, the company’s chief customer officer, welcomes inflation slowing but says it’s essential that businesses continually look within for efficiencies they can pass on to customers.

Having trebled the number of customers over the last three years as Freeman’s transition to a digital fashion pureplay, providing flexible ways to pay, alongside a credit proposition, is key to their pricing strategy enabling customers to manage spending in the way that they want.

Fluctuating inflation affects pricing strategies too. When deciding pricing, inflation is only one of many considerations at Cutter & Squidge, an all-natural bakery with a team of over 50 employees and £8m in revenues.

Annabel Lui, founder of Cutter & Squidge says, “Although inflation is slowing there are other factors to consider – the Brexit border tax which has just come into force and a further tax for importing in April.” 

Referencing the company’s pricing strategy, she says that Cutter & Squidge tries to “cushion customers” from the imperfect storm of rising inflation, rising prices, and rising utilities.

Analysts have their say

Consumers hope for an end to price increases, and while the Key Price Index has fallen back to pre-Ukraine war levels, economics trends expert Dr Roger Gewolb reveals businesses are “continuing to often overcharge for their services.” 

Gewolb advises businesses to be more competitive and offer incentives to customers who have had to cut back on non-essential purchases. He says that businesses should avoid overcharging for their services since the pressures they felt last year have reduced. 

He says, “Passing costs onto consumers may not be the best solution either, as real wages are not expected to return to 2021 levels until 2027, with incomes predicted to remain below pre-pandemic levels even by 2027-2028 in real terms.” 

Amidst these headwinds, cost reductions are often seen as a necessary measure to maintain financial stability as consumers who have felt the strain of steep price hikes will be on the lookout for price cuts. 

Ed Heskins, head of pricing at Iris Pricing Solution, remains cautious revealing that although the rate of inflation is falling, prices and costs are still increasing, with increased wages and higher interest rates impacting margins. 

Heskins says that for the businesses that have passed through sub-inflation price increases during the recent spike, maintaining prices will be “appropriate and necessary.” However, many other businesses that have moved away from cost-plus pricing models will face a trickier decision. 

He continues, “For these businesses, it will be vital to understand how their current pricing and value proposition compares with the wider market.”

Heskins says that the temptation may be to steal market share through sharp price reductions, but it is important to consider competitor responses.

“Avoiding price wars, which serve no one in the long term, is imperative.”

Strategic lessons from supermarket pricing

In the ongoing competition for the title of the UK’s most affordable supermarket in 2023, Aldi has emerged as the winner, playing a central role in the prevailing price wars among major supermarket chains.

Analysis by the comparison website Which? involved monthly assessments of food prices, with secret shoppers evaluating everyday essentials like fruit, bread, and cheese, as well as a full trolley of goods across all UK supermarkets.

Rosalind Hunter, a partner at Simon Kucher, reflects on the media’s focus on supermarkets lowering prices, revealing several key takeaways:

• Price decreases are backed by significant marketing. Companies In other industries can lower prices with no impact because consumers are not aware of the change.
• The changes are seen to impact consumer’s decision-making profitably. Supermarkets know lowering some prices will drive customers to their stores, gaining the overall basket spend. This will not be the case for all businesses that will need to model through the impact on sales.
• Supermarkets can observe competitors making similar moves in the market.

Hunter warns that frequently changing prices can confuse consumers.

“If reducing prices will lead you to increase them again in 6 months, we would recommend holding prices for now to not get a second shock down the line.”