Intelligent pricing: The solution to combat ongoing market turmoil

According to the Office for National Statistics (ONS), inflation in the UK reached 9.4% in June, a percentage not seen within the last 40 years. The rate of increase for raw material prices reached a new high of 24% in June 2022, up from 22.4% in May 2022. The month also saw producer output prices (factory gate prices) increase by 16.5 percent, up from 15.8 percent in May 2022. This is the highest hike since September 1977.

In addition to the effects of Brexit and the Ukrainian conflict, the aftermath of the pandemic has increased the cost of raw materials and disrupted international supply lines. Due to the combined effect of these unique events, many organisations are having to seriously evaluate the way they go about pricing.

As a result of this upheaval, calls for new strategies, measures, and technologies are occurring across the business sector. The size and frequency of price increases necessary to sustain margins are much higher than what most businesses are used to.

The status quo of managing prices through fragmented spreadsheets or separate platforms, can lead to pricing that is lagging, unreliable, and prone to errors. To remain competitive and drive profitable growth, businesses today must constantly monitor changes in costs and market prices.

Where the challenge lies

Most pricing practices are based on the assumption that economic conditions will be steady rather than volatile, uncertain, and constantly changing, and are not prepared to handle rapidly rising input costs. Legacy and often manual pricing techniques end up being too slow, too loose, and too undifferentiated when change does occur, or volatility strikes.

Companies that did not previously routinely implement pricing adjustments now have to pass along price increases to their customers that are much higher than most people have encountered in their careers. The way businesses react to the current pricing crisis will affect far more than just their capacity to withstand the current input cost rise. Furthermore, it will determine how robust, responsive, and effective they will be in the face of any abrupt or sudden shifts in the economy.

Improving existing practices

Instead of only seeing inflation as a reason to raise prices, businesses should see it as a wake-up call to address the unresolved issues with their pricing strategies. With all eyes on price, they have a rare chance to start long overdue improvements that will align their pricing with industry best practises and enable them to adapt to uncertainties both now and in the future.

Organisations that grasp the nettle and adopt better practices contain margin erosion much better than companies that remain static and reactive. Therefore, there are several practice areas that companies can prioritise in order to succeed:

• Pricing
  • Value-based pricing is an excellent strategy right now because in periods when consumers are already anticipating regular price rises, companies have an opportunity to target relatively higher price increases where there is a discrepancy between perceived value and current price.
  • Pricing teams need to work closely with other parts of the organization, to understand how costs will develop over the coming months and use these replacement costs in their price calculations, rather than average or standard costs. The impact should be calculated and understood at the lowest level of their product hierarchies.
  • Surcharges are also important. They help to decouple supply chain cost swings, and customers are more likely to accept them if they are decreased or eliminated when costs stabilise.
  • Leveraging AI to help understand which clients are already close to their price limit versus those who might be more susceptible to accepting increases, makes it a lot easier to achieve the price realizations required.
• Customer negotiations and agreements
  • For the majority of businesses, annual price increases are no longer feasible; instead, monthly or quarterly price changes are required.
  • Hardship clauses should be included in contracts as an alternative to or in addition to more frequent price increases, allowing businesses to adjust prices when certain circumstances arise.
  • Salespeople need to be able to quickly locate suitable product alternatives if there are supply problems or if clients object to price hikes.
  • If clients object to price increases, recovering margin by altering service levels and terms should be considered.
• Other habits
  • If it isn't already standard operating procedure, sales training is essential. In order for the sales teams to convince clients of the value even further, it is critical to clearly communicate the reasons for the price change.
  • Effective analytics are also essential for organisations experiencing issues meeting demand, to help them make decisions about product allocation, assess customer and product profitability, and to monitor the effects of price adjustments. 

Future planning

Organisations have a unique opportunity to transform the way they price their goods and services amidst recurring economic volatility. Midway through 2022, input-cost pressures are still a major concern and are projected to remain so.

The stability that governed previous price decision-making, will likely not subside when inflation stops. As economic conditions continue to change, businesses will always need to be able to react swiftly, precisely, and decisively. This necessitates an empowered organisation with the necessary skill sets in order to secure and maintain informational, strategic, and commercial advantages.

Businesses must be able to act quickly and effectively on pricing in order to succeed. They will perform better than their competitors if they have the procedures and tools needed to make educated decisions, at pace.

Organisations must look past their immediate problems and put into place solutions that will help them now and in the future. For example, making sure that prices are always in line with the market and drive the highest possible margins of revenue profitability for the business while taking into account customer relationships and willingness to pay.