Insights for Intelligently Responding to Inflation: Seven Tips from Pricing Experts
Resurgent demand, coupled with industry’s inability to acquire raw materials, manufacture products, and stock distribution centers, is causing prices to soar on everything from diapers to steel. “The big question is whether shortages and price hikes are temporary byproducts of the pandemic, or if the global economy is changing in ways that could permanently hike the cost of doing business and usher in a new era of inflation,” states CNN.com.
Therefore, it should come as no surprise that inflation is currently top-of-mind for many pricing practitioners. To gain a better understanding of how B2B companies should be dealing with market volatility and intelligently responding to inflationary pressures, we sourced tips from some of the industry’s leading pricing experts and discovered valuable insights into short term approaches to combat inflation, why gaps in processes or technologies are problematic, how price optimization tools hold up during times of high market volatility, and more.
No. 1: Capital Pricing Consultants CEO & Founder Lydia DiLiello on managing the volatile marketplace.
It’s very much 180-degrees from where we were last year when we were speaking about not over discounting. Now, we can’t raise prices fast enough in any industry to accommodate the lack of supply due to the supply chain issues, whether those issues are physically being able to obtain a good or a lack of production. It’s not that they can’t ship it. It’s that it’s simply not made. So, price becomes irrelevant, but my clients are really struggling with how to get out in front of these price increases in cases where they are actually able to obtain the specific goods they’re looking for.
We talk a lot now about the difference between being proactive and reactive. I think IndustryWeek recently published a piece talking about the gaps that manufacturers are seeing, and it was related to the automotive parts industry. The focus was on what happens when you’re constantly reactive and always trying to address the latest crisis or latest emergency. The vast majority of my clients know what they need to do strategically, and yet the emergency that’s being dealt with right now is costs continue to increase, so how do we get a price increase in quickly enough? Companies that have strong pricing skills understand what they need to do. My clients that aren’t as sophisticated are really feeling left out and a bit on the losing end because they simply cannot react fast enough to address the changes in the marketplace.
No. 2: Capital Pricing Consultants CEO & Founder Lydia DiLiello on gaps in pricing processes, technologies, or skillsets that are making it difficult to respond to price increases.
In terms of the specific gaps, I would say communication is the first one. I don’t see companies being as proactive as they should be communicating what’s going on with their customers. I do have a gourmet foods customer who has been very good at that. They posted on their doors that, due to the cost increases in food, expect to see price changes on the menu. They added, “We apologize, but we’ve had no choice.” They preemptively are telling customers before they even get in the door, and I see that as a gap with most of the marketplace. Communication is not as clear as it needs to be, it’s not as direct as it needs to be, and then that communication needs to be followed up within the technology. Clients that don’t have pricing software that are trying to manage things off spreadsheets are honestly losing money faster than they can account for it because, as we’ve seen costs that continue to skyrocket in a months’ time, trying to work from antiquated technology is making a situation that is exceptionally difficult for them now.
No. 3: Author and Pricing Evangelist Stephan Liozu on why manual processes during an inflationary and cost increase period are inefficient.
Let me give you an anecdote. I spoke to the CEO of a company I know very well. They do pricing manually, and in this day in age, they couldn’t increase their price. It took them 90 days to manually change the price in their system and to implement a price increase. Ninety days in an inflationary period is deadly. The CEO is said, “Oh my god, we need to change things.” Because imagine if you have to do it three more times this year. With the diversification of business models, a company is able to now price online, price subscription, price dynamically with bundles, or automate it all the way to the cash collection and payment.
No. 4: PwC Consumer Markets Pricing and Profitability Practice Leader David Moss on short term approaches companies can take to combat inflation pricing pressures.
If companies have not invested in a capability, they haven’t flexed these muscles, or maybe the muscles are out of shape and they need to be rekindled, companies must think about, “Do I want to take a blunt approach?” Having a list price increase that is across the board, it’s not surgical, but let’s say 70% of what you think the inflationary pressure is. Signal to the marketplace that this is the first of many or the first of two at least, and then take the time to really get your long-term pricing with inflation in order. Then three months or six months later, take a second increase that could be in the list price level, at discounts, or it could be through limiting discounts or limiting promotions making them a little less rich.
Really use all the levers you can in that second approach once you’ve really thought through what your long-term architecture should be. But you don’t want to wait. I think that’s the worst thing. You want to do something soon. So, even if you make a guess at what you think the right level should be, and you are conservative about it, you need to do something. Every month that goes by, at least by all of our forecasts for most of the areas of the economy, things are moving up right now and not down.
No. 5: PwC Consumer Markets Pricing and Profitability Practice Leader David Moss on what data you need, and how you can get the needed data in order to properly execute on inflation response strategies.
Companies like Zilliant that have a lot of data infrastructure templates and approaches are in a great position help companies have the right pricing data and translate the inflationary information into pricing actions because of the company’s many simulation capabilities. I think that’s the one side. The other side is translating the commodities into a finished good because you’ll have both labor as well as direct costs. Even things like freight that might not be necessarily in the materials, but in the total cost that goes into getting a product to market.
So, looking at that holistically and translating it on a very regular basis to your cost team to understand your margin compression is absolutely key. This is not the traditional manufacturers updating their standard costs or rolling variances each month into a standard cost approach. That’s part of it. This is really looking at tracking external commodities and external input costs for what’s happening in the marketplace. Everyone has to play by those rules. If your company has hedged or bought early or gotten lucky with lower costs, then that’s good management. That doesn’t necessarily mean that you need to give that great management away to your customers because the market is dealing with the overall commodity pressures.
I hear a lot clients get tied up between what I call “internal inflation,” which is what your true costs are internally based on all your hedging and future buying strategies and external inflation. That is what the market will bear right now on the stock market. It’s that external approach where you should be setting your prices. So, if you’ve done well, you should try to keep that margin or pass it along strategically to key clients. It’s not something that you want to just automatically give away to your customers because you took that risk when you made that hedge. You had to pay a price for that option. If you were right in doing so, then that should go into your coffers, into your bottom line, or into future investments.
No. 6: Zilliant Senior Vice President of Products and Science Pete Eppele on how price optimization tools hold up during times of high market volatility and inflation.
People often have the sense that during volatile times, models may not give you a reliable output. We’ve certainly had the most fertile test ground to challenge that perception. I would throw into that too if you look into what’s happening with oil and gas. Obviously, ransomware attacks on major pipelines have very quickly moved prices up and down in certain markets. I think this is really where the experience of 20 years of price optimization comes into play in terms of building models that hope to understand and, this is a critically important point, help discern changes that are market-driven versus changes that are customer-driven.
An example that I would give on that front is during COVD, especially if you look at how much uncertainty we had back in April of last year, sales were down huge. They were down in different industries. We work with companies that distribute food and bring food to restaurants. Restaurant business was down, and volumes were down in that case. So, you might think that would give you a signal that it’s time to take prices down. What we found is with the algorithms is they did an extraordinarily good job of being able to discern what were just general market moves versus what were volume changes that were price-related volume changes. That’s so important so as to not overreact or underreact. Frankly, when you have those volatile times, seeing things as commodities start to move is really important to understand the relationship between what you charge and the commodity price.
When the science is done right and in a robust way, it’s able to manage extraordinarily well through those volatile times. Being able to understand what’s the difference between a market-driven volume change or a phenomenon of the market versus something that’s related to price is really core to that elasticity calculation and unlocks a tremendous amount of value in terms of helping you set the right price.
No. 7: Zilliant General Manager of Commercial Excellence Barrett Thompson on inflation impacts to customers and differentiated value.
Temporary inflation (supply/demand imbalance) should be addressed with a different response than sustained inflation. I've seen the best outcomes happen when the strategies are used in combination versus isolation. For instance, raising your prices (e.g. price list), combined with adjusting your discounts/rebates (in some cases increasing them), permits a range of net-price results, which includes net-price decreases, some unchanged prices, and also price increases. Targeting which customers receive which of these price changes is absolutely key to success. Considering inflationary effects on customers and differentiated value is both novel and powerful. I expect it will lead to a superior "inflation aware" price segmentation and associated price strategies, which hit the mark.
Whether inflation proves to be a short-term phenomenon or a prolonged reality, B2B companies must react swiftly and wisely. For more about inflation response strategies that deliver the rapidity and intelligence this moment calls for, download our recent whitepaper to learn four strategies to combat inflationary pricing pressures.