The US inflation rate has been 5% or greater since May-20211. Organizations are receiving record cost increases from vendors, and in some cases, multiple increases over 12-month spans2.
The most successful organizations negotiate and deploy working capital measures to minimize cost impact. These companies leverage some combination of the following to do so:
1. estimating cost shifts by breaking apart commodity components and labor rate changes
2. tracking competitor price changes for similar products; shopping prices and rates across multiple vendors
3. committing to favorable rates and terms to mitigate future increases
However, cost increases are inevitable in many situations. Organizations will need to either absorb or pass these along to customers.
If your company needs to increase prices, here are some strategic ways to do so that can strengthen your position.
Operations & Supply Chain
Here are some ways organizations can improve their margins as they pertain to operations and supply chain.
Value engineering involves strategies that lower costs and preserve core product functionality, such as reducing the number of components, reducing component costs via substitution or size reduction, or reducing packaging costs.
Size & Packaging Optimization
This includes reducing package size while maintaining the same price, which CPG companies commonly employ. Proponents of this strategy believe that customers are unlikely to notice smaller package sizes or are more accepting of smaller package sizes than higher price points.
Private Label Assortment
This involves changing assortment from third-party vendors to owned private-label vendors.
Private label assortment is a strategy wholesalers and retailers have pursued over the last few decades to capture the lower costs and higher margins offered by private labels.
Logistics & Shipping
Organizations can capture additional revenue from shipping to offset higher costs on core offerings. This entails strategies such as:
- raising shipping rates
- reducing free-shipping exemptions
- increasing minimum order values to qualify for free or discounted shipping rates.
Pricing + Portfolio Optimization
Organizations that divide product roles and identify them according to price sensitivity can better optimize pricing and discounting to drive incremental sales and margins.
Leading organizations target price increases (or discounts) in categories with lower price sensitivity and perception.
For instance, grocers may minimize price increases to staple categories such as milk and bread, as these items have high price perception – customers will notice when prices go up.
B2B wholesalers and manufacturers may minimize increases to products that represent a higher share of spend or historically have received the most attention during customer negotiations.
Product-Line Price Engineering
Organizations can also avoid increases to opening price point items and pass along higher price increases to more premium models, packages, or brands. Customers purchasing premium offerings are typically less price sensitive.
Inversely, organizations can decrease the price of premium items to entice customers to trade up at a rate that drives higher overall sales and margins.
Pricing + Customer Segmentation:
Organizations that segment their customer base can price discriminate according to customer or segment-level price sensitivity.
Sales teams should help pricing teams evaluate customers and their share of spend.
The framework below helps organizations prioritize price increases. Smaller customers likely need more scale to employ procurement or operational teams that can shop vendors and seamlessly integrate new vendors into their operations.
Conversely, larger customers likely have the scale to do so. Negotiations with larger customers require more information-gathering and diligence to justify increases. The negotiations can also introduce mutually-beneficial alternatives, such as increased sales and orders to offset price increases.
The most successful organizations collect customer demographic information (household income, home value, etc.) and spending history.
Similarly, they’ll segment at the location level for channels unable to price discriminate at the customer level.
Doing so enables data science and pricing functions to develop models that identify willingness to pay and provide customized price, discount, and promotion recommendations. This drives higher overall sales and margins by capturing a more significant share of demand at higher prices for more inelastic segments and lower prices for more elastic segments.
Pricing + Competitive Positioning
Leading organizations across all industries identify their market position by measuring market share and customer value perception. The output supports a decision matrix (see framework below) designed to prioritize and sequence pricing decisions.
Broadly speaking, market share signals an organization’s bargaining power in mitigating or reducing cost increases – higher market share supports greater bargaining power with suppliers and potential for cost mitigation.
Value perception identifies an organization’s vulnerability to market share loss when raising prices – lower value perception suggests higher vulnerability.
Overlaying the two helps prioritize and sequence price increases. It also helps companies determine their value relative to competitors.
High market share, high value perception: Cost pressure is likely equal to or less than competitors, given higher share and scale. In such instances, higher price perception justifies leading the market with price increases.
High market share, low value perceptions: Low value perception makes the organization more vulnerable if leading the market with price increases, instead favoring a follow strategy. These organizations likely outperform competitors due to distribution advantages.
Low market share, high value perception: High value perception justifies price increases. However, market share needs to catch up to competitors due to underperforming distribution capabilities. In such cases, price increases could fund investments to improve and scale distribution.
Low market share, low value perception: Low share and value signals that the offering isn’t resonating with customers. Further price increases will likely worsen value perception, leading to lower market share. This suggests the need to fully reevaluate and reengineer offerings.
Leave It To The Experts
Pricing strategy, especially during record inflation, is incredibly complex. Managing pricing in-house with trained experts helps prevent lapses in time, effort, and margins.
Jennings Executive specializes in sourcing leading pricing talent and would love to match you with top professionals. Contact us today!