Lydia DiLiello is back for part two of her supply chain disruption series. Read on to discover immediate actions you can take to weather the storm with a prescriptive pricing strategy.
By: Lydia DiLiello, Capital Pricing Consultants
Lydia DiLiello is the founder of Capital Pricing Consultants and has been helping clients grow profitably for more than 25 years. Lydia lends her expertise to Zilliant for a three-part blog series on the current supply chain crisis that is dramatically impacting B2B companies’ costing and pricing decisions. Lydia recently appeared on our B2B Reimagined podcast – listen here.
Part I: Staying Afloat in a Time of Crisis
Part III: Projecting the Future
Immediate Pricing Actions to Remedy Negative Supply Chain Impact
In Part I of this blog series, we discussed the historical events that created and are sustaining supply chain disruption: the global economy and geopolitical events that continue to fuel the mess and the short- and long-term plays to protect your company’s revenue and profit streams.
In this next segment, we recommend immediate actions to ease the impact on your company’s overstressed employees, customers and bottom line.
Spoiler alert! The list of actions to take NOW:
- Use whatever data you have available
- Increase prices
- Review all short- and long-term contracts
- Shorten quote dates
- Rationalize product to be sold
- Don’t procrastinate
How do I begin?
Use whatever data you have available:
Identify customers who deliver significant revenue and profit to your business. Are there old sweetheart deals lurking among these top contributors or “one time only” prices that have become entrenched prices in your system? If so, now is the time to change. These deeply discounted “special” prices must be adjusted up to market value immediately. Remember that selling a lot at a little profit still equals a little profit.
Assess your products. Is anything being sold at a loss or dangerously close? Again, once identified, immediately change the price to a market competitive rate. Consider this as a game of horseshoes, where getting close to the pin counts. In other words, look for data intent rather than 100% precision as time will not favor total exactness and rocketing up prices too quickly will lead to customer defection.
It may sound trite to say this, but 50% of my clients raise prices too late and their “stick rate” or percentage of actual price capture is only 65%. This means that for every $1 dollar of increase they are capturing only 65 cents. That 45-cent delta adds up in hurry in an environment where raw material cost increases are arriving on a weekly basis.
Review all short- and long-term contracts
Too time consuming you say? Like boiling the ocean? Ok, subdivide and conquer. Start with the top 10 contracts. Don’t let onerous amounts of data turn into paralysis and margin loss. Almost all contracts contain an “out clause” for catastrophic market conditions. A global pandemic and global supply chain disruption certainly qualify. No held pricing, no extended terms, no grace periods, no way! Now is the time to “release” these agreements and move into market standard pricing. If 45% of your volume is tied up in contracts with preferential discounts like these, money is bleeding out faster than you can possibly stop it.
Shorten quote dates
Keep them valid for one week. While this is administratively taxing, it serves as an immediate protection against selling at subpar margins due to raw material cost increases. It builds in an immediate hedge. For many of us, by the time the “actual” cost is integrated into a system of record it is no longer valid with costs changing every few days or in some cases hours.
Rationalize product to be sold
If product is difficult to procure, why sell it to your best customer at the lowest price? Sell a portion to them, but allocate volume to other customers who are paying higher, more competitive prices.
Albert Einstein said the definition of insanity was continuing to do the same thing over and over and expecting a different result. Continued inaction will net the same continuous negative impact to your bottom line. Make choices and execute.
Bottom line (yes, pun intended), if you choose to implement only one of the above suggestions your company will weather these difficult and unprecedented market conditions more effectively and will exit in a more stable condition. The reality is that none of the above suggestions are easy or without challenges. However, a lack of immediate and significant response may leave many companies in a non-recoverable position.
Read Part III, and listen to Lydia’s recent appearance on B2B Reimagined for more strategies: