Present-day consumers tend to be more sensitive and emotional about price changes, thereby requiring a more nuanced approach by brands and business leaders.
Key Takeaways,
At a point when your competitors are compelled to raise prices, finding competitive strategies to effectively manage costs and maintain prices would give a lasting advantage
Resorting to simply raising prices may have irreversible effects on customer relationships
It's apt time for innovative businesses to thrive
The OECD inflation is projected to reach 6.1% in 2023, and food and raw material prices continue to accelerate. It's evident that businesses and brands need to take a hard look on their pricing & margins and make hard changes to stay competitive and not merely pass it on to their customers. Which if done rashly could have long-term effects such as a decrease in sales, a high price to regain customer loyalty, ultimately negatively impacting the bottom line.
Considering the impact, two primary reasons highlight the importance and necessity for leaders to initiate a change in Strategy. First, the level of unprecedented volatility initiated by the covid-19 pandemic is here to stay, and adapting early would be key. Secondly, this magnitude of cost volatility cannot be managed with traditional controls and processes.
This inflationary environment could be attributed to,
Increase in demand
The post Covid economy bounced back quicker than expected.
Volatility in fuel prices
The war in Russia and many other factors contributed to volatile fuel prices affecting key supply chain factors such as rising freight prices
Currency volatility and devaluation
Due to certain factors, many countries faced a devaluation in their currency, causing imports to be more expensive.
Weak monetary policies
Many central banks in the world opted to print large amounts of cash with a short-sighted vision causing nearly irreversible consequences to the economy
Increase in cost of production
Many factors contributed to an increase in the cost of production. A significant factor was the rise in wages and salaries for employees which had to be made to attract and retain employees.
Therefore, a brand must take an active look at managing prices strategically. Listed below are 12 strategies to make an impactful and long-term strategy.
Optimal supply chain management
As this inflationary environment took all parties by surprise, companies should relook at their supplier contracts and negotiate mutually beneficial clauses on the grounds of inflation, and review quote finalizing procedures.
Review pricing strategies
Decision-makers should undertake to make prudent pricing decisions. For example, its raw materials should have agreements that ideally be on fixed pricing over a period of time and sales prices depending on the spot price, not the other way around.
Manage according to the price sensitivity of your customer
A business should be sensitive to their customer's willingness to pay and speed to consider a substitute. Brands could pass on cost increases through products that have relatively less sensitivity and stay competitive in their key products
Value-based pricing
As opposed to cost-plus pricing, value-based pricing would be the most suitable strategy during an inflationary period. When pricing is value-based, the marketing team too would work on communicating the value coupled with other teams working on how the existing product could deliver greater value.
Incorporate Tech wherever possible
Technology could be incorporated to reduce costs that would set the company in a good trajectory for the long run. The initial investment would be a considerable decision, however the return would indefinitely be visible in the long run.
Identify sensitive cost drivers
Certain costs may tend to be more sensitive and volatile than others, for example fuel prices. Therefore identifying and setting adequate controls to mitigate its volatility would be key.
Invest in R&D and build capabilities and competencies
Similar to investments in tech, investment in R&D would have an initial cost that may find resistance for approval. However, the benefits R&D could garner to the business and the brand over the long haul is invaluable.
Review your product mix
Companies that may have a mix of >50 products should have their product viability assessed regularly. It's important that products that do not support the company's long-term growth be discontinued, thereby reallocating resources for more profitable products.
Pricing, procurement, marketing & finance to work in collaboration
It would essential that teams stop working in silos and start collaborating with one objective in mind, 'get the best goods at the best cost at the optimal time to price our product better at the best possible margin'
Move on to less customized and more standardized products
Companies could revisit their product and stick to a more standardized product, depending on how much the market allows. For example, a Tech company that sells software (non-SaaS) could look at developing a standard product with minimal customization, which in turn would require fewer man-hours.
Ensure more data and insight based decision making
Decision makers should start making more data insight-based decisions to ensure the direction taken makes an actual positive impact
Reset the commission structure
The commission structures of the sales team should move to a more long-term benefit approach, such as the overall long-term value added rather than just the sale value.
Looking to the future
As much as the inflationary environment is a challenge, it provides many opportunities for the innovative leader. Companies that take a novel approach would see an improvement in overall performance, customer loyalty, and profitability.
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