After managing through the pandemic induced slowdown in demand and a resolute cost reduction focus, business leaders are confronted with another big challenge – rising inflation, which is fast becoming a key issue for organizations to protect their margins. The current increase in inflation is, however, not totally unexpected, coming out of the pandemic which created a substantial demand pressure on a supply side that was already stressed due to supply chain bottlenecks and labour market pressures. What has added a further sense of urgency to the problem is the impact of ongoing geopolitical scenario (Russia-Ukraine war). The result of all these factors has collectively led to a sharp rise in prices – both for input commodities as well as final goods.
Preparing to battle this sudden rise of inflation is one of the most difficult tasks that confront the management. However, from a corporate point of view, what leaders need to understand is not only the single consumer price inflation (CPI) number but more importantly the producer price inflation in a B2B sales model. Not only must the company be prepared structurally and financially, but you must also change how you think about inflation. Simply passing on cost increase to customers across the board can damage customer relationships.
Faced with these challenges, what should the leaders do? We believe there are 3 main areas to focus on:
Of these, adapting the Pricing strategy is critical to managing the adverse impact of inflation and keeping pace with the market changes. There are numerous effective tactics one can adopt to deal with this challenge. One, segmenting your customers across profit gainers vs profit drainers will provide insights into where you really make money. Deeper study through analytics can help you determine which customers/segments are less price sensitive and you can thus tailor your strategy accordingly.
Two, similar analysis is warranted at the product level too. Instead of raising prices uniformly across sthe range, it is better to manage different increase values for the core and peripheral products to get the overall average increase you are aiming for. Three, in addition, value added services demonstrate a higher increase potential. Hence bundling them with your products can not only help you achieve your objective but also overcome any resistance from customers. Four, another aspect to consider is a judicious indirect price increase in case of deviations from the preferred terms, for example for expedited orders, longer payment terms etc.
Five, the leadership team needs to recognize that at these times pricing must not be controlled by the sales force alone. They are generally seen to have a psychological aversion to raising prices as the dominant thinking is of capturing as many customer orders as possible. Some of the required changes entail facing the customers with courage, modifying the KPIs & incentives to focus on raising prices, conducting training sessions to help frontline prepare better and at times make joint visits to convince key customer accounts.
To control and maintain your pricing power it is imperative that you focus on the above highlighted areas2. However, there are two issues you need to be careful about. First, the cost & pricing analysis must be done in great depth with dedicated time & effort and not superficially. Second, what matters is the price realization after the price increase - how much have you really been able to capture. The advantage may be frittered away by offering more than normal discounts to get the orders to meet the already stressed targets.
During inflation times leaders are tested differently. Therefore, in summary, the key areas for them to focus their attention & efforts are:
With a tailored and nuanced pricing plan in place you will build a strong capability within the organization to manage prices during inflation and if done right, will improve your position with the customers as a preferred & trusted partner. Your priority needs to be real revenue and growth.
1. Refer our earlier
insight “Controlling the Right Costs” for additional details
2. Refer our earlier insight “Adapting your Pricing Strategy” for additional details