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A recent survey of CFO’s from manufacturing companies throughout the U.S. conducted recently by the consulting firm Price, Waterhouse, Coopers indicates that nearly half of those companies surveyed expect a 10 percent decline in profitability in the near future before business returns to what can be defined as normal. With that in mind, CFOs are pursuing operating and pricing changes to enhance revenue growth with 41 percent citing Pricing Strategy as one of their top priorities.
There is no one answer to product pricing. Much depends on what stage of the growth cycle the business is in. An early stage business might need to capture market share and has a plan to compete for a time at a lower price point. A business with commodity-type products might survive on a lower margin to compete with other commodity producers. A business with very little competition can charge a premium price for their product depending on demand.
In addition to market influences on the pricing model, there are economic factors to consider. A 3rd Quarter 2021 Federal Reserve Business Outlook Survey indicated, “The percentage of firms reporting increases in input prices (71 percent) far exceeded the percentage reporting decreases (4 percent).” Some of the economic influences on input pricing include:
- Inflation — The Federal Open Market Committee forecasts a 4.3 percent inflation rate through 2021 and somewhat less than that for 2022.
- Employee Costs — Over the year 2021, total compensation rose 3.7 percent, wages and salaries rose 4.2 percent and benefit costs rose 2.5 percent.
- Transportation Costs — Expect overall transportation costs to increase 5 percent to 7 percent through 2022.
- Commodities Pricing — Inflation in commodities pricing, including metals, agricultural products and energy are expected to be an overall 3.2 percent in 2022.
Many execs and owners avoid increasing prices if they possibly can. For them, it is not normally one of the levers they pull to achieve the profit performance required.
Changes in pricing could mean losing the volume needed to utilize capacity. On the other hand, margins squeezed too low can mean disaster.
Pricing is a crucial part of an organization’s strategy in preparing for more normal market conditions. A proactive approach to pricing should include three areas: Be creative in meeting customer needs while preserving value, drive strong pricing discipline and invest boldly in capabilities for the future.
- Be creative in meeting customer needs — Make it easier for customers to purchase from you by extending terms, lock in prices for later purchases, offer discounts for volume purchasing, focus special offerings to meet current needs such as packaging work-from-home oriented products from your larger product line.
- Drive strong pricing discipline — Review pricing discount programs to make sure all customers have earned their discounts and adjust as needed to company policy. Review add-on costs such as freight and service charges to reflect actual costs. Many businesses are now adding another invoice line for Oregon’s Commercial Activity Tax.
- Invest boldly in capabilities — Adjust the sales model and include the tools needed to allow sales reps to do their job remotely if that has been your business model through COVID. Change or add data capturing capability that will identify shifts in customer demand. Continually evaluate internal employee talent and ask long term employees for their input on how to improve systems.
The consulting firm McKensey and Company says, “More than 20 years of research shows that most high-performing companies pursue their strategies consistently through economic cycles — including agile, precise and disciplined pricing. Top pricing leaders look at the world through ‘strategic bifocals,’ keeping a close watch on near-term resilience while pursuing long-term goals in order to emerge stronger when the recovery begins.”
Companies that adapt their business models, listen to their customers, adjust their offerings and innovate to drive a strong top line will be the ones that succeed.
Bruce Barrett is a Certified SCORE Mentor and a Commercial Real Estate Broker with Windermere Commercial. barrett@windermere.com.
