Managing price to protect your margins
Rising inflation can pose a real threat to businesses – but savvy teams may see it as an opportunity. Maria Orlowski, Director at Inflexion with responsibility for Commercial Strategy, recently hosted a session on this crucial topic for the Inflexion portfolio.
A perfect storm is brewing for inflation. Brexit-related friction, supply chain disruptions from the pandemic, low interest rates and uncertainty around those and energy prices are all coming together to put upward pressure on costs. While many – including the Bank of England as well as the Fed – are suggesting the situation may be transitory, it may be wise to plan for the longer-term: if it turns out to be short-term, then at least businesses and customers are prepared to manage price and margins proactively. And equity may be eroded if the problems that come from rising costs aren’t dealt with.
Inflexion recently surveyed its portfolio with the results showing that inflation is considered the number one risk to businesses in 2022.
The timing may be serendipitous, since businesses are aware that costs are increasing and therefore budgeting accordingly, creating a real tailwind for value-driven pricing. Over 50% of those surveyed in the Inflexion portfolio are also feeling increased price pressure from competitors and customer dynamics. This makes managing price more important than it’s ever been before.
“You can only manage this effectively if you prepare properly. Doing so helps you get the impact you need and deserve,” says Maria Orlowski, Director at Inflexion. With many businesses planning a price increase for this year, preparing and over-preparing will be critical for success. Most price reviews fail to reach their full targets because they’ve been insufficiently thought out.
Fortunately, there are frameworks in place for helping to drive the process in a smooth and effective way (see box). As part of its value acceleration toolkit, Inflexion provides advice on commercial strategy to its portfolio, and focuses on ensuring price and value is truly aligned to drive success. Much of the work is founded on setting ambitious but realistic goals, being data- and customer-driven and getting internal buy-in to overcome any fears.
Price value alignment in action
These areas of focus have helped a number of Inflexion portfolio companies to enhance their margins through reassessing their pricing: roof tile specialist Marley differentiated its pricing to better align with value and costs to see a significant EBITDA improvement, supply chain and risk management solutions specialist Alcumus optimised its pricing and packaging to better match customer needs to see a 70% increase in transaction value.
Specialist engineering business Aspen Pumps Group became a lot more agile and ambitious owing to the pandemic and the increases in cost, cost volatility and supply chain uncertainty. They have successfully pivoted to managing costs and prices more proactively to protect their margins and deliver a customer-centric service.
“Before Covid, our cost platform was very predictable and stable, and we could adjust prices annually in line with low inflationary changes.” explains Serge Becker, Managing Director at Aspen.
But then came the pandemic. “It changed our costs dramatically because we had a far less stable supply chain. It meant we had to rethink our pricing strategy further and so we moved to look at it by product and region to better align with cost changes.”
The business also ensured it made any changes as customer-friendly and transparent as possible – looking not only at price levels, but also transportation charges, more fair rebates and discounts.
The impact of the price and cost exercise has been meaningful for Aspen. “We’ve spent a lot of time speaking to customers and explaining what changes are made and why. With the increased volatility in the market, we’ve also changed customer expectations, with them more accustomed to a dynamic environment. Finally, we now ensure sales teams really buy into all this.” Building internal transparency on costs has been critical to the success and confidence of the sales team.
And just as the pandemic forced Aspen to undertake its pricing review more than once, all companies should see aligning price, cost and value as an ongoing exercise rather than a ‘one and done’. “The process should be repeatable. Ensure that once you’ve been through it once, you have the right skills and tools to continue to down the line,” Maria advises.
9 steps to adjusting pricing
Structuring price reviews is key to ensuring a favourable outcome, according to Simon Kucher & Partners, a strategy and marketing consultancy. The firm offers the following framework for affecting price adjustment campaigns:
Configure the price levels:
- Set high level targets: Consider which products, segments and customers can be adjusted
- Product-specific targets: Consider which value-added services should be adjusted more
- Customer-specific targets: Differentiate targets by customer segments and channels
- Guidelines and escalation rules: Define clear approval rules in case of deviations from target
- Sales incentives: Reward success– for example a percentage of achieved increase beyond a hurdle, which incurs no cost to the business
- Communication: Communicate price increase including reasoning externally and internally
Roll out the initiative:
- Training: Provide scripted responses, argumentation guidelines and negotiation training
- Monitoring: Ensure there is full transparency on the status at all times
- Steering: React immediately and adequately if deviations from target are observed