Quarterly reporting season is here once again and, while many are doing well, not all companies are shining. What four things went wrong with pricing?
As the pandemic waxed, inventory that was designed and destined for commercial markets when unsold and items needed for consumer markets were flying off the shelf. This occurred in paper towels, household cleansers, meat, and many other categories.
As the pandemic waned, other shocks to the economic system wreaked havoc. Shortages of computer chips impacted production of automobiles and other machinery while cost increases on key chemicals inputs drove major price increases in agrochemicals, coatings, adhesives, and many other specialty chemicals. Meanwhile, labor shortages and logistic challenges related to re-igniting local services and global supply chains raised the cost of doing business for most companies.
Yet, how do we manage such huge swings in supply and demand?
1. Basic predictive tools don’t work when there is a shock to the system.
Basic predictive models of price and demand woefully underperform when there is a shock to the economy. Past expectations of market prices quickly become outdated. Measurements of elasticity made during stable economic times and measured using small single-digit percent price changes are of little use when predicting the impact of a large two-digit percent price increase across an industry. Worse, companies rarely manage industry wide demand for their offerings. Generally, competition and differential value drive pricing decisions and optimization. This creates uncertainty when a single company seeks to raise prices without confidence that other companies in the same industry will also raise prices.
Engineered pricing is insufficient for managing prices during economic shocks. One must turn to strategic, artful, and scientific hypothesis-driven approaches.
2. Managing prices during economic shocks requires pricing mastery, and too many companies are still at the beginning of their pricing journey.
In a five-level description of the pricing journey, companies move from (1) ad hoc pricing to (2) controlled pricing, and then to (3) value-based pricing and (4) price segmentation and optimization before reaching (5) pricing mastery.
Moving towards pricing mastery takes time and effort, requires human and technical resources, and puts pressure on building organizational capabilities. While some companies appear to have taken the journey towards pricing mastery, like GE, Proctor & Gamble, Piaggio, and others, too many companies have not. Pricing is still the domain of spreadsheet jockeys who finds themselves overruled by a sales executive seeking to close “strategic” deals.
During economic shocks, pricing mastery at the organizational level is required. In the Moorman and Day marketing capabilities paradigm, pricing today requires companies to have not only basic predictive knowledge and skills, but to also have built upon those skills, embedded them throughout the organization, integrated their pricing capability with other processes and procedures, and developed the organizational experience and confidence to pivot quickly and execute upon changing plans.
3. Unresolved organizational conflicts are not delivering “creative conflict” but rather inertial standstills.
Economic shocks highlight needed organizational capabilities. Simple tools and techniques are insufficient for managing quick, corporate-wide changes.
To manage this, some companies have set up “pricing war rooms” to make decisions regarding specific offerings and prices. While a this is a good practice during an economic shock, the ability of the pricing war room members to drive good decisions is dependent upon their collective knowledge of the strategies and tactics of good pricing. A single pricing expert is not enough. Rather, a broader cross-functional team needs to engage in best-practice pricing repeatedly to understand why certain recommendations should be trusted and others not.
Too often, we find sales asking for lower prices, marketing focusing on promotions and offering development, and finance focusing on margins. During a pricing crisis, each of these departments either hollers louder at each other or shuts down and hibernates until the smoke clears. This is not a recipe for success but rather for standoffs and trigger-happy shouting matches.
As discussed in Pricing Done Right, leading firms build the organizational capability to enable pricing professionals to work with sales, marketing, finance, and others in guiding pricing decisions. And pricing professionals guide the pricing decisions not simply at the execution (“deal desk”) level, but at the commercial policy, market, pricing strategy, and corporate strategy levels.
4. Price increases are not keeping up with cost increases.
As a result, firms are finding it very hard to have price increases catch up with cost increases.
Investors are hammering firms that have rising costs and insufficient strategies for maintaining margins, AND, at the same time but from the opposite extreme, hammering firms that raise prices along with costs to offset insufficient strategies for maintaining selling volumes.
CEOs are feeling this pressure strongly today. “Quick fixes” won’t suffice. Leading firms that have built the necessary organizational skills and knowledge in pricing will still find the current economic shocks difficult to manage. Those that haven’t invested in pricing yet may find themselves at the mercy of the economic winds.
Yet, as long as you are in the game, it is not too late to build the necessary organizational skills and capabilities. This economic shock won’t be the last one. Another one will come. Will you be ready?