Rule One: Price for Profit
Inflation complicates every aspect of pricing. Rule One is about using price to increase profits. Profits result when an organization understands how their products and services create value for their customers. Higher levels of profit come when a firm sets a fair price based on that value and executes those prices through a salesforce that is prepared to capture, not discount the set prices with customers.
For the first time in decades, persistent inflation has become an urgent short-term consideration for companies around the world. Our view is that, while inflation certainly complicates every aspect of pricing, it also represents an ideal opportunity to make long-overdue changes to pricing practices. For that reason, struggling with short-term inflation may have some long-term benefits.
Inflation has propelled the issue of pricing from the backroom to the boardroom. For all the pain it imposes, inflation actually has an unseen benefit. It’s that the attention of C-suite business executives will never be more focused on pricing than it is right now. C-Suite leaders are acutely attentive to the unavoidable fact that inflation has an unforgiving impact on the profits of companies that fail to manage it with agility. When input costs rise drastically, an enterprise’s profits will take a dive unless it can quickly pass along price increases and, when it comes to inflation, nimbleness is the imperative.
Most analysts agree on two things. One, that the rate of inflation growth – and the related pain of supply chain volatility – is the highest it has been in more than four decades. Two, that inflation
is persistent and that it represents a long-term systemic challenge to businesses large and small. While the Consumer Price Index (CPI) as reported by The Commerce Department recently topped 8.5 percent – the highest since 1981 – we are actually more focused on the less well-known U.S. Producer Price Index. That index, measuring inflation for processed goods for intermediate demand, rose by 24.4 percent in 2021, the index’s largest calendar-year increase since 1974. The International Monetary Fund’s All Commodity Price Index increased by 49 percent in the same 12 months. The bottom line is that inflation-driven supply chain volatility, compounded by the COVID-19 pandemic labor shortages, intensifies the pricing pressures on businesses in every sector and those pressures will not soon recede.
When the Tide Goes Out
The persistent global inflation we are experiencing today exposes a limitation of most B2B pricing practices. “You only find out who is swimming naked when the tide goes out,” is a nugget of wisdom attributed to Warren Buffett, the most successful investor in American history. What the Oracle of Omaha means by this observation is that you really can’t tell whose investing strategy works or appreciate the risks that businesses are taking when markets are performing well. Only when markets are challenged by adverse conditions can we discriminate between those who are smart and those who are just lucky.
While Buffet’s aphorism chiefly applies to investors, it is relevant to the general pricing practices of businesses large and small. It’s no secret that virtually every business tolerates legacy pricing practices they know to be sub-optimal. In a stable and flourishing market, these inefficiencies were mostly tolerated. But when confronted by rapidly rising input costs combined with supply chain volatility, the limitations of legacy pricing practices suddenly can no longer be ignored.
C-suite leaders around the world are seeing that inflation is forcing the tide to recede. Many are rightly concerned about what their stakeholders will see. When inflationary pressures cause costs to increase at the same time that supply chain disruptions soften demand, certain pricing practices turn out to be too slow, too lax, and too undifferentiated.
All is not lost. The practices prescribed by this book will help you modernize your firm’s pricing practices to best leverage the challenges of persistent inflation. Inflation gives you opportunities to raise prices. No customer welcomes price increases, but end users tend to be receptive to pricing upticks backed by a well-articulated and robust rationale. For now, remember that the more your price increase can accurately reflect value and the true cost increases of your products and services, the better you will protect the profits of the firm.