We’ve all seen the headlines and felt the impact of inflation over the past 12 months. Inflation is at a 40 year high. Whether your company directly faces pricing challenges due to supply shortage, logistical constraints, raw material cost, or limited production, almost all organizations face the same challenge nowadays: with costs increasing, how do we protect our margins without harming our customer relationships and their price perception?
Times call for a different pricing approach and adjustments in your pricing strategy. How and when to tackle margin erosion, drive profitable growth, and manage through this new situation requires a thorough understanding of the market. Additionally, you will need a critical viewpoint on your own internal strengths and weaknesses. Maple Street Advisors is here to help guide you through this tumultuous time with some thoughts and strategies you can apply to your business today to turn this challenge into an opportunity.
How to approach this challenging situation
Rising costs can either be passed on to customers or absorbed by your margin. When there is no option other than to increase the prices of your offerings, you need to consider the right approach. Questions such as “how to time price increases” and “for which products/services should prices be increased first” will have to be answered in advance.
Here are a few recommendations for approaching this challenge.
- Don’t lose focus on your value proposition, mission, and vision statement. These should guide you to the right decision on your timing and pricing position.
- Monitor the market and the pricing moves of your main competitors/resellers. In these times of inflation, taking the role of a follower might be your strategic move. However, a fast response is essential to both maintaining your ideal price position and not losing margins over extended periods of time.
- When you need to increase the prices of your offerings to stop margin erosion, take a close look at your pricing and sales data and divide your customers and offerings into different segments. Don’t take the easy way out and do a blanket increase across all product offerings. This can have detrimental effects on revenue. By segmenting customers and products, you can make well thought-through pricing decisions per product segment.
- Define clear and quantifiable objectives for each segment and think about alternative strategic plans when price increases do not work out as intended.
- Adjust your communication and marketing efforts to your ‘new’ pricing strategy.
- Enable your sales teams and other customer facing roles to communicate your pricing changes effectively with customers.
- Continue monitoring the market so you can adjust your pricing flexibly and dynamically.
Increasing costs equals an opportunity
Logistical shipment challenges and global labor and materials shortages have resulted in increasing manufacturing and stock shortages. Many organizations face delivery problems and need to tell their customers that a product is not available.
Increased manufacturing costs require a shift to being more cost-plus focused when setting your price. Your pricing strategy requires price tactics that protect your margins or reach predefined markup targets. Often the default is to just pass along the increased costs to customers. However, you may be missing an opportunity to also capture additional margin in these increases.
Ensure you’ve implemented a stock-based pricing strategy within your organization. This will automate alignment between supply and demand based on real-time inventory data. Price advice can therefore be dynamically adjusted to market dynamics and your own internal stock-constraints. A low stock level might result in a higher price to protect yourselves against having to say ‘no’ to customers. On the other hand, pricing might be used as an asset to control limited stock levels at this moment in time to stabilize deliveries until peak periods.
All stock-related data points can be used to set your pricing rules, from days of sales inventory to amount in stock. Especially when reorders are hard and it takes a long time to restock, you don’t want to run out of popular products while your competitors still have them available.
As prices rise across the board, your customers will expect your prices to increase. Leverage market and customer research to help determine how far you can push the pricing envelope with your increases.
Leverage creative packaging to offset impact
Preservation of the trust and loyalty of your customers is often at risk with significant price increases. A series of pricing adjustments might awaken your customers and steer them into reevaluating alternatives, such as the competition. Therefore, careful measures are needed, and pricing decisions made on product-based features might be helpful.
When facing the need to increase prices to prevent margin erosion, you may want to determine cross-sell opportunities and bundle popular products with value-adding long-tail assortment or value-adding services. In this way, you balance out margin gains across your assortment without risking too much harm to your customer price perceptions for popular or best-selling products. When setting your pricing strategies upon those different groups, it is best to first increase margin on your long-tail products that are bundled up with your high-runners.
Finally, it might be useful to already think ahead and start planning your future pricing tactics when all the dust has settled, and inflation is back to normal. Is it going to be your aim to restore prices to the level they were before or does this era provide an opportunity in the future to increase profitability and compete on another level for some categories?
In these challenging but interesting times, feel free to contact our team at Maple Street to get additional insights.