Authors: Sudipto Banerjee, Himanshu Mishra, and Z. Maria Wang, PhD
Supply-aware dynamic pricing enables companies to meet demand and protect margins in a new and shifting landscape, as the authors explain. Sudipto Banerjee (sudiptobanerjee@kpmg.com) leads the Commercial Excellence and Pricing practice for KPMG. He specializes in commercial transformation, including pricing (strategy, execution, and enablement), sales growth (demand drivers, sales force effectiveness, channel management), and marketing effectiveness (ROMI, promo effectiveness). Himanshu Mishra (hmishra2@kpmg.com) is a leader in KPMG’s Commercial excellence practice. He has supported clients across technology, media, and consumer goods industries, on commercial transformation, including pricing, and broader Go-to-Market strategy. Z. Maria Wang, PhD (zmariawang@kpmg.com) is a Director of Pricing and Commercial Strategy of KPMG US. She has more than 15 years’ experience in management & strategy consulting and technology.
The Journal of Professional Pricing, September 2023
Supply-aware dynamic pricing enables companies to meet demand and protect margins in a new and shifting landscape.
Introduction: What to do now to outperform with pricing
Demand surges and an extraordinary breakdown in global supply chains are raising the cost of everything from fertilizer to silicon chips. Even before the emergence of the Omicron COVID-19 variant, supply chain disruptions were worsening, driving U.S. inflation to 40-year highs, resulting in direct pressure on profits. Even Amazon, one of the world’s largest retailers, reported slower growth recently due to higher supply chain costs.1
Repairing and restructuring supply chains will take many months and major investments. But companies can use strategic pricing now
to manage rising costs, product shortages, and severe delays—and maintain or even expand margins. It’s a big leap for many organizations, especially some consumer-facing and many B2B companies that still rely on unsophisticated approaches such as cost-plus or simple index-based pricing. These and other blunt pricing methods can leave money on the table, erode brand value, and create openings for competitors.
Using a new approach that we call supply-aware dynamic pricing (SADP), companies can adapt to shifting supply chain realities by adjusting the price of every SKU on a monthly, weekly, or even daily basis. Informed by SADP’s forward-looking view of supply conditions and demand dynamics, companies can avoid near-sighted pricing mistakes, shape demand across products, customer segments, and geographies— and deliver more to customers and shareholders.
In this brief paper, we describe how SADP can help companies navigate today’s unfamiliar and volatile landscape and set the stage for step- changes in pricing excellence, including organizational changes that will pay dividends for years to come in good times and bad.
Supply-aware pricing shapes demand and reflects supply-chain realities
Various forms of “dynamic pricing” are in wide use today. Rideshare pricing can change by the hour, for example, and airlines and hotels adjust prices several times a week based on supply and demand. The SADP framework goes further. It accounts for likely supply disruptions and helps companies adapt their pricing and product offering decisions accordingly. A comprehensive set of data and advanced analytics are applied to model the market and optimize pricing choices. The factors include product hierarchies and substitution options, customer segmentation, likely competitor moves, inventory conditions, supply outlook, and inflation.
This pricing framework is new because it aims to dynamically redirect demand through pricing (see Exhibit 1 “SADP focus within the supply-demand equilibrium”), and avoids common pricing pitfalls (see Exhibit 2 “Avoiding the top five pricing pitfalls”). The latter is an important step in building pricing maturity—developing the processes and organizational foundations for pricing excellence.
Exhibit 2: Avoiding the top five pricing pitfalls
Prices speak to customers, suppliers, and competitors. Getting them wrong can damage perceptions, relationships, brands and the bottom line. Every company should be wary of common missteps:
Supply-aware pricing shapes demand and reflects supply-chain realities
Supply-aware dynamic pricing includes three key elements:
Shaping demand based on deep supply awareness
Traditional pricing and promotions shape demand, but SADP goes deeper, incorporating inventory position, production capacity and supply forecasts in optimizing price and promotion cadence and depth by category, product line and SKU. Used in conjunction with customer hyper-segmentation, it can keep price changes in line with value for each customer. Optimization includes reducing stockout risk while preserving margin without aggressive inventory hoarding.
Managing customer expectations and price perceptions
Managing price perception is important in every B2C and B2B environment, but it’s even more crucial today when prices are shifting quickly. Collaborating with merchandising, marketing, and other functions, pricing teams can use SADP to manage items and categories to protect price perceptions in line with the brand, channel, and overall business strategies.
With or without supply constraints, SADP can account for item and category role shifts and brand repositioning when setting prices for key and super key value items.
Using data-driven insights to guide product substitution
In normal times, product substitution can be a zero-sum game. Under today’s supply constraints, however, it can become a source of demand that bypasses stockouts and takes advantage of demand transference across a brand or product line.
The SADP framework forecasts the impact of pricing on substitute products at the SKU level. It also ties product assortment management into pricing based on surgical examinations of the viability of SKUs, driving revenue and profitability at the portfolio level.
Dynamic pricing programs are essential for most large companies in today’s fast-changing marketplace—and those with the most sophisticated approaches will hit their quarterly and strategic targets and outperform peers more consistently.
The next step: pricing maturity
Across industries and around the world, we have found that companies can improve their pricing maturity with new tools and capabilities, along with organizational and mindset changes. A pricing function using SADP requires a steady stream of input from procurement, manufacturing, logistics and store operations. Pricing also works closely with strategic planning, finance, and product development, and informs the activities of branding and marketing, sales and trade promotions, and customer operations.
Cross-functional teams can gain valuable insights into supply, channel activities and macroeconomic data—as well as traditional customer and product data. But this requires connected workflows, integrated business planning and the right enterprise-level technology.
Pricing maturity also requires changes in mindsets. Today, that means thinking of pricing in terms of both supply and demand. Building a mature pricing function takes time and investments in tools and training, but the benefits are clear and enduring. Few corporate initiatives, from cost-cutting to R&D, can drive performance as quickly or reliably as pricing.
As supply chains, customer behavior, and markets continue to move quickly and in unexpected directions, companies with superior pricing strategies will outperform. They will adjust prices in the right directions, on the right items, and at the right moments to build their brands, improve margins, and sustain customer loyalty.
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1 Source: Sebastian Herrera, “Amazon Earnings Suffer as Growth Slows, Costs Rise,” Wall Street Journal, October 28, 2021