3 Lessons From Hyperinflationary Periods: Reduce the Company’s Costs of Changing Prices
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Authors:
(1) Mark Bergen, Carlson School of Management, University of Minnesota;
(2) Thomas Bergen, Carlson School of Management, University of Minnesota;
(3) Daniel Levy, Department of Economics, Bar-Ilan University, Department of Economics, Emory University, and ISET at Tbilisi State University, 0108 Tbilisi, Georgia;
(4) Rose Semenov, Carlson School of Management, University of Minnesota.
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Table of Links
Abstract
Reduce the company’s costs of changing prices (“menu cost”)
Reduce customers’ “stress of uncertainty”
Reduce societal fears of “shrinkflation, greedflation, and doubtflation"
References
1. Reduce the company’s costs of changing prices (“menu cost”)
Our research shows the costs of changing prices (known is “menu cost”) can be far greater than managers recognize, especially during high inflationary environments. We documented the average costs of changing prices per store at four major US grocery chains using in-depth studies of their weekly price change processes (Levy, Bergen, Dutta, and Venable, 1997), analyzing workflow schematics, and undertaking detailed instore time and motion measurements of each process step across multiple stores at each chain (Levy, Dutta, Bergen, and Venable, 1998). The costs include the labor cost to change shelf prices, the cost of printing and delivering new price tags, the costs of mistakes made during the price change process, and the cost of in-store supervision of the price change process. Applying these costs to the largest US grocery chain, Kroger, would yield an annual cost of $291.9 million in total across 2,757 of their stores. Now, imagine a hyperinflationary scenario like Zimbabwe in 2008 where prices doubled every day. These price change processes would be undertaken seven times a week, rather than once a week. This would cause the total annual cost of price adjustment to balloon to $2.04 billion a year.
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Successfully dealing with high inflation requires managing pricing processes to reduce the costs of price adjustment. This often involves using simplified pricing rules or adopting new pricing technologies. For example, Israeli booksellers went from pricing individually to pricing groups of books by assigning letter codes (A, B, C, …, etc.) and posting a price list. In Brazil, retailers digitized price adjustments with electronic shelf labels, which eliminated the labor costs required to manually update prices across hundreds of products now being re-priced multiple times (rather than once) per week.
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The costs of hyperinflation can also be curtailed by grounding prices in more stable currencies. During Israeli runaway inflation, quoting prices in dollars was frequent for durable goods and housing—even at amounts greater than citizens were legally allowed to hold. In Venezuela during the current hyperinflation, sellers are adopting peer-to-peer cryptocurrency payments, allowing street vendors to price with digital coins. By simplifying processes, investing in technology, and presenting price stability, organizations can reduce the costs of changing prices to navigate inflationary pressures.
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This paper is available on arxiv under CC BY 4.0 DEED license.
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