Rapidly rising costs are creating an undeniable need for re-pricing, tempting many companies to increase prices across the board. But although seemingly simpler to implement than other strategies, the peanut butter approach is not a good idea in today’s inflationary environment and it can greatly hurt customer relationships. Not all products and services come at the same costs or customer value, so unique optimal pricing tactics are mandatory for each product or service.
Pricing experts advise businesses to analyze the company’s costs and determine where inflation is exerting the heaviest pressure. Establishing a baseline of how cost pressure impacts margins informs the process of formulating price uplift targets—and that is only the beginning. In addition, there are several other practices that pricing experts recommend for adapting pricing to inflation while ensuring that profit margins are protected.
1. Adjust discounts and promotions
There is no way to go around price increases during times of high inflation levels. But according to McKinsey & Company, businesses that “consistently address total customer and product profitability are likely to weather inflationary cycles better than those that focus solely on cost changes, which can limit the size and frequency of their price increases. These companies typically embed a pocket-price-waterfall approach in their pricing and revenue-management strategies.”
The pocket-price-waterfall approach analyzes every price reduction and cost of making a sale after the initial list price, shining a light on the hidden costs and profit leakages at every price level. This strategy helps companies understand why some customers are more profitable than others and identify areas of ineffective pricing.
Using this approach, companies can adjust discounts and promotions which cause significant amounts of revenue to leak away from list or base prices. The discounts, incentives, promotions, and other giveaways offered to customers in order to close deals and maintain volumes can create a deep hole in the pocket, which is far from ideal considering the circumstances.
2. Maximize non-price levers
From raw material and production costs to freight charges, there are several elements that influence the price that customers end up paying for a product or service. Inflation causes that price to increase, which often causes conflict between the supplier and the customer.
It’s difficult to navigate price conflicts and justify price increases even in inflationary environments. To address price sensitivity and mitigate it, companies need to maximize non-price levers, starting with communication—properly conveying added value to customers and managing misperceptions of conflict.
Another non-price lever is differentiated offering such as distinct product lines, selective access to products, and exclusivity. Emphasizing differentiation and avoiding direct price competition is the key to maximizing these levers and even unlocking additional revenue streams based on them.
3. Capitalize on added value
A customer’s willingness to pay is directly proportional to the value they derive from a product or service. That being said, different customers derive different levels of value from the products and services provided.
With that in mind, the best approach is to use personalization tools that can help tailor inflationary price increases for each customer or product segment. Doing so also enables companies to shift away from the peanut butter approach of making broad price increases that can often be perceived by customers as insensitive. Using pricing data and analytics to examine end-to-end profitability, companies can make more informed price-increase recommendations.
For aftermarket service providers, innovative business models such as outcome-based contracting or performance-based contracting can lead to more profitable service-level agreements and value propositions that deliver on the expectations of customers and their willingness to pay.
4. Reduce costs on product design
According to McKinsey & Company, best-in-class enterprises aim at adjusting product design for the items that are affected by inflation the most. As a response to increased demand and servicing costs, their solution is to fine-tune the process—from materials and packaging to product features—without sacrificing functionality.
Companies that don’t have the ability to swiftly redesign products rely on category management to decrease costs by reducing SKU complexity or minimizing inventory. Another alternative is to design for service due to increased product and customer lifetime value as well as enhanced service excellence.
This alternative is quite profitable and cost-saving because extending a product’s lifecycle also extends the customer’s lifetime value. Additionally, it loyalizes customers, enabling them to stay in the client-supplier relationship for longer while also minimizing price sensitivity.
5. Build a dedicated council
As the 2022 Pricing Excellence Report states, companies are being more deliberate in prioritizing pricing efforts and executing pricing strategies accordingly. For some companies, the pricing function is expanding even further this year, as 22.22% of survey respondents have revealed that they are looking to recruit more professional pricers in the coming year. This is significant because, without a dedicated team of pricing experts, managing inflation and price increases is difficult, to say the least.
The process of increasing prices in response to inflation takes time. Taking into account the pressure and consequences of inflation, adjusting prices sooner rather than later is essential. Companies that have the ability to be responsive and efficient in inflationary environments typically have a board or council of cross-functional decision-makers and experts who can take action and respond to market feedback in a time-efficient manner based on data and analytics.
On that note…
Incomplete insights lead to poor pricing practices and misinformed decisions. And the consequences of that are particularly painful in times of crisis and high inflation. That’s why collecting data and knowing how to make sense of it is so important today.
On May 18, 2022, at 09:30 CET, industry experts from Vendavo and Copperberg will discuss how data and the right methods for analyzing it lead to successful pricing decisions. Join the webinar and learn why Pricing Data Is Ubiquitous—your pricing practices will be much more informed for it.