How to Protect Price and Profitability Amidst Market Volatility
The market environment over the past few years has been favorable for price changes due to high levels of inflation—businesses have been raising their prices and customers have been understanding of these changes. This has allowed world-class pricing organizations to increase their margins by being proactive and strategic with their price management and stay ahead of the curve. But now that the environment has shifted and market volatility has led to expanded cost and demand uncertainty, organizations are facing pressure to give back price. While there may be instances where this is warranted, it’s important that organizations pause and assess their price management strategy and goals before taking action. Businesses should base their decisions on data-driven facts to determine the optimal approach to safeguard profitability while managing shifts in customer behavior and market conditions.
Over the last several months, consumers have been reading headlines about deflation, demand shifts, and recession risks. But in reality, most businesses are facing a much more complex situation. Businesses across industries are experiencing a range of cost scenarios, including:
- Costs that continue to rise
- Costs that are going down, but still higher than recent years
- Costs that have been relatively flat
- A mix of certain costs going up, going down, and remaining flat
- Costs that are declining
Many organizations are facing a similar situation with demand. While some demand trends have occurred by industry, in other cases customer demand might vary by product line, region, channel, or other factors. For most companies, it’s simply not accurate to categorically state that cost or demand is up or down.
In many cases, organizations are facing more complex situations than what their customers might be hearing. This market volatility is causing tension between pricing organizations and their customers. For example, many businesses that are experiencing cost decreases find that their costs are still high overall relative to the last few years of inflation. You may notice that customers react quickly to news of cost reductions, much more quickly than many businesses were able to implement price increases during inflationary periods. These factors alongside market shifts make it challenging for organizations to understand the optimal pricing solutions to implement to manage their unique cost and demand complexities, customer expectations, and revenue or margin goals.
In this post, we’ll breakdown the different market volatility scenarios businesses are facing and the best price management solutions to implement in order to manage profits and safeguard business growth objectives.
My Costs Continue to Rise
If market volatility is leading to continued rising costs, it’s imperative to implement pricing actions, such as differentiated price increases, to get caught up—and quickly. If any of your end market demand shifts, there may be a point where price increases become more challenging to implement, and you will be behind the curve. If you are already behind on taking price increases, it’s important to set the rules of engagement with customers now to avoid an adverse situation where costs go down in the future and customers ask for deeper discounts that you are not prepared for. Also, be thoughtful about the messaging you take to the marketplace so that you are not just accounting for commodity cost increases but also reflecting the value you deliver.
In cases where your customers are pushing back because of what they are hearing from other sources, it’s crucial to understand your cost to serve your customers so you can bring fact-based visibility at a customer-product level instead of anecdotes or gut feelings.
Worried about demand or volume?
There are always risks associated with pricing actions, especially price increases. Fortunately, there are several tools your business can utilize to confidently determine the appropriate pricing solutions to deploy while managing risk. Depending on your organization’s unique growth goals, a few approaches include:
- Deploy market intelligence studies, such as customer willingness to pay, price sensitivity, value mapping, or competitive analysis, to capture the voice of your customer and optimal price points
- Leverage historical customer trends and micro-segmentation to conduct a differentiated price increase that is adjusted for risk based on price sensitivity factors
- Focus on price leak management, such as freight management, payment terms, or other standard fees, to capture lost profit from inadvertent price leaks
- Focus on price outlier management, or customers who are priced well below their peers, to boost profitability
My Costs are Flat or Going Down, But Still High Relatively Speaking
For many businesses in this situation there may still be opportunities for differentiated price increases, especially if you did not respond quickly enough during recent record inflation levels. Moreover, these organizations would also value from price management that focus on programs that address price leaks, alongside robust price analytics and measurement structures for consistent visibility to any changes that might occur. Examples include:
- Ensure repeat business is consistently at or above last price paid
- Identify and address low or negative margin customers through differentiated price adjustments and/or discount management
- Review and maintain effectiveness of policies such as freight or rebate programs; consider revising for profit growth
- Reduce lesser-monitored price leaks such as seasonal discounts, customization fees, free samples, credit card fees, or emergency orders
- Vigorously monitor discount usage and price overrides
- Deploy sales performance dashboards to manage and quickly respond to unwarranted sales rep behavior
- Deploy tailored dashboards for key accounts that track risk through analyses such as volume trends, win rate, price reductions, and customer churn
Worried about demand or volume?
If market volatility is causing costs to go down in some areas and you are sensitive to how your customers may respond to pricing actions, it’s important to keep in mind that price reductions are not automatically warranted. A cost decline doesn’t necessarily offset the large inflationary increases that have occurred over the last few years—especially if your business absorbed those costs. Understanding your customer perceptions, robustly tracking cost changes, and deploying value-based pricing is critical to managing and optimizing price. Organizations should understand where there are pockets of opportunity with certain customer and product groups and capture value through pricing actions noted above. Where customers are more price sensitive and/or already in-line with peer pricing, your business may consider taking a stance of protecting price.
It’s Mixed – Some Costs are Up, Others are Down
While data visibility is important in all scenarios, it plays a unique role in more complex situations such as this. For organizations that have a more diverse product offering or customer base, it’s likely that market volatility is resulting in costs and demand that are all over the board. A diversified and surgical approach to price management is critical here to maintain or grow profits. However, your organization needs to understand which areas of your business are experiencing what. Robust, timely pricing analytics will help direct which pricing actions are warranted and optimal. From continued price increases, to discount policy revisions, to price concession management, the approach will be unique based on certain customer or product segments.
Especially important is understanding price versus volume mix—did you experience growth from price alone, a mix of price and volume, or volume alone—and tracking it more frequently than usual to account for sudden shifts.
Worried about demand or volume?
Continue to maintain the mindset that a decrease in your costs doesn’t automatically validate customer price cuts across the board, especially where you haven’t caught up with inflation. Make sure you’ve segmented your customers and products appropriately to apply optimal pricing solutions that account for risk.
For example, you may find freight is operating at a loss across the business, but freight costs are impacting certain areas of the business more than others. There are freight policies you can implement to help turn this into a profit center—however the program should incorporate nuances such as customer location, customer loyalty, competitive factors, availability, rush requests, and customer tier to adjust for risk while managing margin.
Additionally, be thoughtful during market volatility about implementing special promotions or other special pricing programs. Keep in mind if your demand is not growing, it isn’t helpful to introduce a promotion—that is, a lower price—on normal buys, or existing customers making their normal product purchases. These types of special offers are best utilized in cases of incremental buys.
My Costs are Going Down, and My Customers Probably Know It
Some organizations may be facing more distressing market volatility. While your business may be facing significant pressure from customers to reduce price, it’s imperative to preserve a mindset of holding or protecting price. It may not be possible in every situation, but simply giving back price across the board is not only destructive to your bottom line, but likely not necessary. Here are a few ways your organization can protect price:
Empower your sales team to have meaningful conversations
- Internal alignment and training on value position
- Price negotiation training
- Visibility to pricing analyses such as historical purchase patterns, margin trends, and price outliers versus peers to inform pricing decisions with facts versus anecdotes
Understand true profitability at a customer-product level through cost to serve analysis
- Surface where price leaks are occurring by customer—these adjustments could offset other losses due to volume or cost
- Surface price outliers where customers are receiving deeper discounts or lower pricing than their peers
- Identify customers and products with low margin that you can afford to take more risk with
Understand and incorporate customer price sensitivity or competitive factors
- Identify which customers you’re at the highest or lowest risk of losing and adjust pricing actions accordingly
- Adjust pricing solutions according to competitive factors based on region, product line, or end market served
Understand how contract language and terms affect customer pricing
- Be thoughtful on the timing and execution of any price reductions for contract terms based on index cost
- Consider how much you increased price due to inflation, and therefore how much is reasonable due to deflation
- How much have your costs overall changed—index changes don’t account for all your cost or value
- Option to renegotiate contract terms, especially those that are operating in good faith or were created in different economic conditions
Make sure your costs incurred are decreasing appropriately with raw material costs
- Employ negotiation tactics with your raw material suppliers
- Consider switching suppliers where applicable
- Consider prudently communicating with select customers how your costs have not declined despite what they may believe
If you have to give back price, think about where you want to invest
- Understand the gives and gets—which customer or product types are most valuable to your business? Where are customer price concessions occurring?
- Consider all the factors going into a customer’s price—discounts, freight, payment terms, etc.
- Apply reductions through a segmented, differentiated, and timed approach
- Ensure customer communications capture your value proposition to minimize being seen as only a cost line item
My Demand Has been Going Down, and I Don’t Know Why
There are a multitude of reasons why demand or volume could be changing. First, it’s important to surface which areas of the business are most affected—for example, are certain regions, product lines, end markets, customer types, or channels seeing different volume trends than others? Then, consider the following questions to help uncover how market volatility is affecting your business:
- Is volume decline due to price alone, or could there be other causes?
- How easy is it for customers to switch suppliers?
- Are customers deferring purchases, and why?
- Has your competitive landscape changed?
- How are you priced relative to competitors and value delivered?
- Do you understand your customers’ price sensitivity?
- Are you able to identify which specific customers might be at risk?
Keep in mind that answers to these questions could vary by business unit, product line, end market, etc., making the appropriate response more complex than one-size-fits-all. A market research study may help identify how you are priced relative to competitors and how your customers perceive your value and your price. Once you better understand the root cause—even if there are multiple—you can deploy optimal price management programs to address the source. Then, implement pricing analytics and reporting to flag trends and proactively trigger appropriate pricing decisions ongoing.
What are Price Management Best Practices in All Scenarios?
Regardless of your current situation, price management, especially during market volatility, is a complex affair that should be handled in a targeted, purposeful manner to optimize results. Below are a few best practices that all leading pricing organizations should use:
- Make sure you can quickly aggregate and leverage your data to inform data-driven pricing decisions as close to real-time as possible
- Maintain a pulse on actual customer sentiments and your competitive landscape through market studies, instead of reacting to anecdotes and gut feelings
- Apply a targeted, surgical mentality to your pricing actions—not all customers or transactions are the same
- Explore and address the root cause of demand, volume, and cost changes—often it’s more than one factor
- Maintain a mindset of holding price first, and understand your true cost to serve before taking any price reduction actions
- Equip your sales teams with the right training, documentation, and governance to empower them for customer conversations, then set up systems of measurement and accountability
Tackle Market Volatility Head-On with INSIGHT2PROFIT
Understanding the best price for your customers while maximizing profits is never easy. When changes in cost and demand across different portions of your business start to affect your bottom line, INSIGHT2PROFIT can help. First, we’ll partner with you to identify the best price management approach according to your unique situation and business goals. Then we’ll execute customized pricing solutions that maximize results. Last, we’ll measure and continuously refine to ensure sustainability through business and market volatility and fluctuations. Contact INSIGHT today for help tackling your profitability challenges.