Supply chain disruptions and resurgent demand from reopening global economies are causing prices to soar, along with concerns of prolonged inflation. Inflation has an obvious impact on consumers, but the upstream effect on distributors and manufacturers is just as profound. Their ability to respond smartly and swiftly is more critical than ever.
B2B companies continue to scramble to source steel, lumber, copper and other materials that are trading at premium prices. Companies that have continued to rely on manual processes and gut-feel decisions in their approach to pricing will be put at a short-term and long-term disadvantage as margins are likely to suffer.
Four pricing strategies for an inflationary period
When inflation hits, it’s critical to first quantify the full impact to your finished goods (if a manufacturer) or stocked inventory (distributor) and then work backward. If you manufacture products with complex formulations, some ingredients will be hit harder than others. Therefore, it’s necessary to quickly understand which formulations are affected and by how much, and account for all labor, freight, and other variable costs related to your final product.
Strategy 1: Take price up
If a company is a leader in its industry, this type of visible price increase in inflationary times is preferable. It presents less risk, and competitors are likely looking to the leader to provide air cover. If the leader doesn’t take price up, the industry as a whole begins to leak margin.
The mechanics of price increases are difficult and must be made thoughtfully and strategically. Across-the-board price increases are not likely to yield the desired margin results, as large customers are likely to push back. Instead, companies should take a more surgical approach to increasing prices.
Strategy 2: Adjust discount structure/rebates
If a company is not an industry leader, and the leader hasn’t yet increased its list prices, it’s a good time to get creative by dialing back variable discount amounts and/or increasing rebate thresholds. This form of invisible price increase is a behind-the-scenes method of functionally raising price without taking a public list-price increase.
This strategy requires a precise orchestration of a company’s discounting and incentive strategy, which almost certainly cannot be executed quickly enough with manual pricing tools.
Strategy 3: Allocation, allocation, allocation
With many industries facing a low-supply situation, companies will undoubtedly put some of their products on allocation. The key here is to be judicious in deciding which customers are subject to allocation and where to set the optimal price thresholds.
One building-products manufacturer is weathering the rise in steel costs by making intelligent allocation decisions informed by optimized customer-specific prices (CSP). With CSP guidance implemented, the manufacturer can enact a policy in which customers can buy up to their average purchase amount at the current month’s price, but if they want to buy more, the additional spend is transacted at next month’s increased price.
Strategy 4: Change sales incentives, change behavior
Communication during a crisis can make all the difference between success and failure. Money talks for any sales team, so the best way to drive effective communication is to financially reward the necessary behavior. Doing this right requires agility, responsiveness, and sales team buy-in. B2B companies must lean on the tried-and-true carrot (incentives) and stick (reporting) methods in a data-driven fashion.
For manufacturers facing commodity shortages and shrinking inventories, a sound strategy is to heavily incentivize margin percentage. Considering there is limited downward pressure on margin, coupled with accepted knowledge of volume shortfalls, it’s critical to limit discounting and change reps’ behavior quickly. Communicate a limited-time margin incentive, track adoption with real-time analytics to hold sellers accountable, and continually reinforce the urgency.
Whether inflation is transitory or long term, B2B companies should seize the opportunity to be prepared with an intelligent and measured price response. Companies that utilize modern price optimization and price-and-deal management software have discovered that it is possible to be surgical and speedy at scale. These sophisticated systems power intelligent commerce and can rapidly execute all of the above inflation-response strategies. This is how leading organizations are making pricing competency synonymous with business resiliency, enabling them to act and react quickly when market triggers require companies to make price moves.
Greg Peters is chairman, president and CEO with Zilliant