3 Lessons From Hyperinflationary Periods: Reduce Customers’ “Stress of Uncertainty”
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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
2. Reduce customers’ “stress of uncertainty”
During runaway inflation, it is hard to know the value of anything because inflation creates volatile price fluctuations and distorts relative prices. Routine purchases become more complex and demanding, mentally and emotionally. The stress of uncertainty from inflation weighs heavily on customers and is made worse by the uncertainty of the ongoing pandemic, the Ukraine war, and fears of recession. As managers, successfully dealing with high inflation requires focusing on ways to help reduce the customers' stress of uncertainty. This often involves using strategies such as commitment and indexation.
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Managers can commit to absorbing some future volatility through offering payment plans like Israeli stores did across many categories during runaway inflation. For example, an Israeli guitar selling for a price of 100 shekels pre-inflation, was advertised at five payments of 100 shekels each during inflation. For customers, this allows them to afford the product immediately even with tighter budgets and finish payments in less valuable future currency. For firms, using payments allowed them to share the risk and burden of hyperinflation with customers at levels supporting economic survival and profitability. Similarly, sellers are using payments to attract customers in Argentina during runaway inflation in categories ranging from furniture to clothing to kitchen utensils to video game consoles.
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Indexation allows contract prices to automatically adjust based on the inflation rate. Israeli, German, and Argentinian B2B firms dealt with runaway inflation using indexation to diminish the volatility. During hyperinflation these contracts were indexed to established metrics such as their countries’ Consumer Price Index (CPI) or Producer Price Index (PPI). Similar contracting is used by companies buying and selling offerings with volatile commodity or input costs – with the indexation being tied to a particular commodity or input. By focusing on the impact inflation has on your customers, companies can differentiate themselves by helping to solve the everyday challenges of shopping during inflation.
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This paper is available on arxiv under CC BY 4.0 DEED license.
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