Even with some encouraging signs around cooling inflation rates in late 2022, the coming year is still shaping up to be challenging for businesses, which will likely continue to struggle with pricing their products amid surging demand, supply chain challenges, labor shortages and geopolitical unrest.
Cost volatility is likely to stay for a while, with some indications that costs could move up and down faster rather than slower. How can companies respond to an increasingly fast-moving market while retaining and growing margins?
Executives can begin by taking a cue from the space program. At the beginning of a mission, the crew rockets up through the atmosphere, just as prices rise sharply during inflationary times. Upon re-entry, however, astronauts enjoy a softer parachute-enabled landing rather than a steep drop. Of course, this “rocket up, parachute down” strategy sounds great, but some significant factors currently hold businesses back from taking advantage of this approach.
Automating tools to free up strategy
First, just as NASA wouldn’t send a rocket into space with outdated tools to support the mission, too many businesses are held back by a legacy reliance on manual methods to manage pricing. The traditional triad of spreadsheets, email and swivel chairs as a means to exchange and update information is buckling under the pressure of so much change and so much data.
Pricing processes are an area ripe for digital transformation. By automating standard procedures like bringing in unlimited data sets, updating price lists, optimizing prices and performing currency conversions, teams not only keep up with the speed of business but also free themselves up to execute an effective pricing strategy.
Applying the strategy of price optimization
Given the number of factors that go into pricing decisions, some businesses opt for a one-size-fits-all approach. But the common cost-plus strategy needs to be narrower and faster to adapt to new information. It’s one thing to send prices up to account for inflation, but companies with a broad pricing model might find their prices plummeting if costs drop or worse, find themselves losing business as prices remain too high for certain customers and products, and they aren’t equipped to surgically, slowly and strategically lower prices.
Price optimization provides that parachute to ease prices down with a soft landing. Price optimization simultaneously accounts for all the factors that drive price, rationally aligns price/customer/order/product relationships simultaneously and measures what drives price response in the market. It also simultaneously enforces necessary guardrails and produces prices for all the different ways price is expressed.
Price optimization enables companies to know when, where and how much to lower prices to continue to meet P&L objectives. Rather than dropping prices quickly in one decrease, smaller price decreases can be implemented in a more agile and intentional manner. This scenario allows companies to retain more margin — and if a recession is on the horizon — success means keeping the pricing and margin gains for as long as possible.
Maintaining agility in a non-linear journey
The complexity of pricing in today’s economy, along with the increased pressure many organizations face with ongoing digital transformation efforts, has created the need for teams to remain agile in the face of increasing volatility and change. Even the most well-intentioned plans for responding to the factors that trigger a price change are not fast enough with manual tools alone.
But having agile tools, strategies and processes eases that burden and allows pricing teams to react more quickly to new information. Building agility into the system means teams can spend less time reviewing and approving every single step and instead focus on margin-driving strategies and reacting to market trends in a much more data-driven way.
Whether inflation continues to rocket up or collides with a recession in 2023, companies should be ready to use smart software tools to be prepared with an intelligent and measured response. Taking the guesswork out of pricing allows practitioners and stakeholders to act and react quickly when market triggers necessitate a price change.