Alexander MacKay Leads Pricing Lab at Harvard Business School

Alexander MacKay is one of the leaders of the Pricing Lab at Harvard Business School. The lab is a research center that focuses on studying how companies set prices. MacKay has observed that since the pandemic, businesses have become more willing to experiment with their pricing strategies. Big companies, which used to increase prices once a year, are now raising prices more frequently. Retailers are increasingly using digital price displays that can be easily changed. Executives across different industries are conducting tests to determine the price points that consumers are willing to bear.

The pandemic disrupted supply chains and increased corporate costs, forcing companies to think more creatively about their pricing strategies. This has led to a trend of more rigorous pricing, with companies realizing that they can play with prices without driving away customers. The experimentation continues even as costs start to ease.

Companies are now trying to figure out how to protect their profits as interest rates rise and savings decline, making consumers more price sensitive. Many companies may be able to maintain their profits by keeping prices steady as their own costs decrease. However, some are considering whether they can further raise prices as demand slows and overall inflation subsides.

There is currently a focus on profit margins over market share. Many corporations are prioritizing higher profit margins, even if it means sacrificing growth. This is a departure from the post-2009 recession period when companies competed on price to attract cost-sensitive shoppers. Now, companies are aiming for a balance between revenue and profit.

Retailers are also adopting “inventory discipline” to avoid selling products at clearance prices. They prefer running out of products rather than slashing prices, as it has a less negative impact on their bottom line. American Eagle Outfitters, for example, has been expanding its margins by maintaining tight inventory and promotional discipline.

Companies have also discovered that they can charge more than they initially thought. Some consumers are not deterred by price increases, indicating that certain products were underpriced. Additionally, branding a product or experience as luxury has allowed companies to charge higher prices.

However, price sensitivity may return. Consumers are starting to pull back in response to higher prices, particularly at brands that cater to lower-income consumers. Walmart and McDonald’s have seen business expand as wealthier individuals look for deals, but lower-income customers are facing challenges.

While companies are finding ways to protect their margins, it remains uncertain if they can sustain their profits as the economy slows down. Customers are becoming more resistant to price increases, and companies will need to adapt accordingly.