Effective sales and pricing strategies have become a pressing priority in almost every industry, as supply chain turmoil drives substantial inflation across multiple cost lines, including raw material input costs, labour, energy, and other overheads.
Just as the second- and third-order impacts of the conflict in Ukraine are forcing businesses to fundamentally reassess their medium- to long-term business strategies, so too is the daisy chain effect on pricing that, while difficult to quantify exactly, will undoubtedly land in the medium term.
For example, the immediate volatility and high prices of natural gas is headlining as an energy crisis affecting businesses and consumers alike. However, the knock-on effects that this will have on manufacturing and supply chains may have a domino effect of additional shocks to the cost of production later in time. For example, as natural gas is used to make fertiliser, this will then either increase the cost of producing grain or affect farming grain yields (due to lower fertiliser usage). Eventually this will affect the cost of producing protein, too, given grain’s use as animal feed.
To make the right decisions and build flexible sales and pricing strategies that mitigate risk to the degree that is possible in the face of uncertainty, it is vital that organisations have access to accurate and up to date analytics and market insights, falling into three distinct categories:
- A margin model tracking from raw materials through to end SKU
Organisations should be rapidly shifting gears towards a forensic understanding of the cost to deliver any individual product or service, representative of fully-loaded costs – truly variable, ‘varialisable’-fixed, and truly fixed.
Companies may have an aggregate understanding of the immediate inflationary effects they’re experiencing, but the high level of granularity in this model can demonstrate the net effect change of any future isolated raw material input cost fluctuation on an individual SKU. As an example, a change to the input cost of aluminium or steel will have a varying proportional net effect on hundreds of SKUs using tinned packaging, depending on the product inside and, of course, the size of the can.
If each differential impact on margin from each raw material is mapped, then the scope, necessity, and – importantly for sales – the accompanying rationale for price increases becomes significantly clearer.
- Customer perceptions and their propensity to pay a premium
It is vital to understand how customers perceive your current prices, the quality of your products and services, and the value for money they feel they receive.
Any price increases on discretionary purchases such as meals out or premium branded goods in the current inflationary environment will be tough calls to make, given high levels of competition and the squeeze on the everyday cost of living for consumers. Knowing how much more customers might be willing to pay for a product or service won’t be a one-size-fits-all answer either, so testing is crucial in gauging different reactions and perceptions of value in different customer segments or geographic locations.
Knowing the answers to these critical questions is key to shaping a pricing strategy that balances the need to recover input cost increases with what customers are able or willing to pay.
- Competitor insights
Depending on the consumer value perception of a brand, price increases may result in decreased purchase amounts or, at worst, prompt consumers to leave completely. However, consumers are more likely to remain loyal to the brands they trust and value. Fierce competition will be raging though, and temptation will be severely tested for customers when reviewing the value that is potentially available away from their preferred brands. Therefore, understanding the price movements of comparative products and services, alongside consumer preference insights, will be key to understanding the likely success of price increases whilst inflation remains high.
The deepest understanding of one’s own business is at the heart of implementing an effective approach to sales and pricing – detailed revenue and cost analytics must form the backbone of decision making.
Combining customer insight, competitor activity and cost inflation will provide the opportunity for a “sweet spot” to be identified, if all three perspectives can be aligned. However, with so many variables at play, one view could well emerge as a dominant force, which must then be meticulously optimised within the constraints of the other two. Flexibility, therefore – in the face of so many medium- to long-term unknowns – will continue to play a critical role in setting the course for success.