Inflation is our new reality. The phenomenon is exacerbated, and in some ways caused by, supply chain turmoil and an inventory shortage.
B2B companies can ill afford to sit idly by and wait for the worst to pass. Manufacturers and distributors are experiencing cost increases from their suppliers, difficult conversations with their customers, and a cloudy forecast.
Counteract Inflationary Pressure
Last year, the Harvard Business Review reported that the inflationary macroeconomic situation is unfamiliar to many company executives:
Most corporate leaders have not dealt with macro inflation during their careers, leaving them unsure of how to proceed. At one manufacturer, for instance, the CFO recently told us that although revenues have grown steadily, the bottom line fills him with dread, as spiking costs for raw material, labor, and energy have reduced profit margins from 15% to 10%.
A food manufacturer is suddenly staring at a $200 million hole because of exploding commodity prices. And a building products manufacturer, experiencing the highest sales and worst margins in 20 years, discovered that one of its distribution channels — historically an attractive, high-volume channel — is now unprofitable in absolute terms, as weekly cost fluctuations and supply chain delays wreak havoc.
In this article, we will describe why acting with speed, agility and precision is the key to weathering inflationary pressure. By doing so, you can meet your commercial performance metrics. We will also discuss the importance of clear communication once price updates have been made. For your convenience, we have also included links to relevant and original Zilliant content items on inflation response strategies.
Inflationary periods are revelatory. They separate the leaders from the laggards in near real time. In the era of digital commerce, this separation happens right out in the open for all B2B buyers to witness.
You must act swiftly to maintain an edge against your competition. The ability to quickly and precisely update prices in advance of a cost increase is critical to bottom line performance. You may even decide to raise prices before your competition. You then need to be able to quickly calculate how much to raise them by, so as not to torpedo sales.
Where possible, raise prices in line with inflation, but always with an eye on price elasticity. When a cost increase occurs, pass it through as soon as possible. It's important to do this in a surgical manner, as opposed to an across-the-board price increase.
For many companies, the status quo for a cost-driven price increase is 30-90 days. If this is your reality, that is an indicator that it is time to invest in pricing software.
Though it may seem counterintuitive, a well-thought-out discounting strategy can bear fruit even in times of inflation. Surgical price reductions and strategic rebate programs can shape demand toward product categories in which you carry high or excess inventory. Make sales reps aware of relevant product substitution opportunities to retain business even if their first choice of product is unavailable.
Pricing is your most powerful lever to pull to mitigate the downward pressure on margins that inflation represents. But even the most optimized price changes can confuse or fluster your customers without the right communication strategy. Pair science and communication to “seize an opportunity to solidify trust and reputation by addressing supply chain issues and inflation head-on.” (Gartner)
Inflation is not a secret. Customers expect to pay higher prices right now. They will appreciate transparency into how and why your prices are going up. Keep them informed of inventory status and expected availability dates for out-of-stock items as well.
Many B2B companies conduct business via long-term contracts, some of which are governed by volume commitments. Inflationary pressure is particularly acute in these scenarios, as contracts signed 12 months ago don't account for skyrocketing costs. Ideally, you have written clauses into each contract that allow for cost-driven increases or shortage of inventory.
Even in such instances, however, a price hike may lead customers to seek out another supplier, putting volume commitments at risk. Identification, communication and remediation of these problems is the key to preventing severe profit loss or relationship crises.
Similarly, direct and open communication with your suppliers is more critical than ever. Work together to plan product availability, forecast wait times and establish reasonable allocation strategies where necessary. A collaborative relationship with upstream suppliers will empower your teams to be more proactive and decisive in communications with end customers. Getting out in front of upcoming cost hikes is also invaluable to the efficacy of your pricing models.
It is nearly impossible to effectively respond to inflationary pressure in a timely manner using traditional B2B pricing and sales tools. There is not enough time or resources to update prices and deliver them to sellers and customers. There is too much data coming in too quickly.
The following resources will guide you in ditching the spreadsheets and legacy systems for a more effective inflation response toolset. Namely, data science-driven price optimization and sales effectiveness engines, and centralized, cloud-native applications to manage rebates, campaigns and prices.