The Point of No "Return" in Pricing

Beer sales might be a strange way to talk about the point of no "return" when it comes to inflationary pressures. But here I am talking about it.

The thing is, during times like these when prices are rising faster than paychecks and there seems to be no end in sight at the register for paying more for just about everything, many businesses get accused of price gouging.

In the eyes of some consumers, there must be something shady going on here.

And I will admit, sometimes it certainly feels that way. Like how convenient it always seems to be that right before a weekend or especially a holiday weekend, gas prices suddenly shoot up. And I feel that way even though I understand certain macroeconomic things that factor into why that happens—and it has nothing to do with price gouging.

Inflation is also not a product of or a result of price gouging.

The simple fact of the matter is that when inflation hits, it hits everyone. And businesses are not immune to it any more than anyone else is. The cost of raw materials goes up. The cost of utilities to run the machines go up. The cost of wages possibly goes up. The cost to transport finished product goes up. Every aspect of the cost of running the business goes up.

And in order to maintain their margins and remain profitable, so does the cost they sell their products for go up.

But like most things, there is a limit here. There is only so much a customer will pay for something before they finally decide it costs too much and leave it on the shelf. This is the point of no "return" on the prospect of raising prices to protect margins.

In other words, at some point the customer will simply refuse to pay the higher price such as what happened with beer maker Heineken. They raised prices enough that consumers finally said no, and their sales dropped over 4% in the last quarter as a result.

Granted, there are certain things that consumers have a need for regardless of how much it costs. Certain foods, for example. Gas for the car. But even on those two things there are certain things that consumers we can do to curb costs. 

They really don't have us by the balls at the end of the day as much as we may want to believe that.

Consumers still have the power to send a message, and many do. When egg prices hit $4 and $5 per dozen, I simply stopped eating eggs. And did so for 3-months. And I don't think I was the only one, because one thing I observed when I went into the grocery stores was that eggs were always fully stocked.

People were not buying them. Demand for eggs plummeted. Egg prices came back down. 

Granted, the costs driving the prices up didn't change. In fact, because inflation is far from done, costs actually continued to rise. So, now the businesses have to make a decision. Either allow product to rot on the shelves and not get paid anything for it or sell it cheaper and suffer through a period of lower margins.

And that's exactly what you are seeing. More and more businesses are reporting lower sales numbers due to higher prices but are also reporting lower margins. Many are saying, "We have simply reached a point where we can no longer afford to raise prices and stay afloat even if we lose money or experience lower margins on every sale."

Heineken, as an example, knows that the more it continues to raise prices in order to compensate for higher production costs, the more customers they will likely lose as a result. It's a no-win situation. 

So, as much as we like to think that the companies are simply trying to take advantage of us, the reality is that they're not. In fact, they cannot. Especially in areas where there are alternative options for consumers to choose.

There is a flip side here, as there always tends to be, and that's that consumers pulling back and saying no actually helps to curb inflation. It weakens demand and with less money pouring into the economy, suddenly things slow down economically, which is a primary ingredient to combatting inflation.

There may be a short period in between all of this before inflation really comes down when businesses may hold certain prices to try to recoup what they lost when margins were lower. But even that will be short-lived. Because consumers do see the news. If they see that inflation as a whole is waning but prices aren't coming down, there will be backlash for that.

As it has always been said in business, the markets will charge what the markets are willing to bear. And when it comes to that, there is a point of no return. There is a point at which consumers will ultimately decide what prices should be. And businesses will either have to pay attention or risk losing their business.

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